The devaluation of the Chinese currency has revealed four asset classes and industries showing extreme vulnerability in the face of continued pressure on the emerging market nation.
That is according to David Riley, head of credit strategy at UK-based investment firm BlueBay Asset Management.
In a market overview, Riley, who joined from ratings agency Fitch in July 2013, said China’s efforts to devalue its currency marked a sensible step and said it was not a step towards increased ‘currency wars’.
‘We don’t think that China has become an aggressive participant in the global ‘currency war’ but it is clear that it no longer wants to be an innocent bystander after a more than 10% real appreciation of the currency and loss of international competitiveness over the last year.’
‘We expect continued PBoC intervention to smooth the depreciation of the CNY against the US dollar over the remainder of the year,’ he said.
However, one key aspect from the activity, Riley said, was how it had shone a light on those areas of the market trading with a tight correlation to Chinese growth.
‘The response of global financial markets to the surprise devaluation of the CNY offers a guide to investors’ judgement of the potential ‘winners’ and ‘losers’ from a China economic downturn.’
‘German manufacturing and luxury goods producers, along with Asian and commodity currencies and related assets are the ‘losers’.’
‘Developed market domestic consumer-oriented sectors and ‘core’ government and high-grade corporate bonds are the principal beneficiaries. The biggest winner however is volatility,’ he said.
Riley said the overall market response indicated a widespread concern about the global economy being in a China-led deflationary spiral.
‘The near-term growth outlook for China has deteriorated with recent high-frequency data indicating that the industrial sector is stagnating, and we are concerned that the robust consumer-led service sector of the economy could have been damaged by the recent Chinese stock market crash.’
In response, Riley expects further policy easing to take place, which will take the form of further interest rate cuts and of banks required reserve ratios. In the coming weeks, Riley said markets will be highly sensitive to economic data announcements.