Increased lending alongside Chinese government measures to boost growth through the domestic economy is causing a credit bubble in China that is being overlooked by investors, according to GAM's Paul McNamara.
China last year cut rates twice to support the loans market and a growth-led policy. Investors should expect that China will continue to prioritise growth over fiscal and monetary tightening, according to Citywire AAA-Eurostars rated McNamara.
'Anything that impedes growth is going to be discouraged by authorities there. China and Asia as a whole have seen foreign export markets take a huge hit - these countries have made up the difference with domestically driven growth and both the bonds and the rates are very low.'
Overweight in Latin America and in the CEMEA region, McNamara's $7.4 billion JB Multibond - Local Emerging Bond fund currently has held an underweight in Asian bonds for two years due to what he sees as lagging growth and an uncompetitive remnimbi compared to currencies of exporting rivals such as Mexico.
'We've now got credit to GDP across Asia at the same levels as before the 1997 Asia crash. We don't expect a re-run because this time the loans are not accompanied by current account deficits and the banks are more conservatively run. It is a headwind though that is not being treated with sufficient respect by investors.'
Weaker growth in Asia will also provide a lag in demand for commodities. The gap will then largely depend on growth in Europe and the US, he added.
'Countries that will continue to do well in an environment of controlled commodity prices and moderate recovery in the developed world are places like Poland, Turkey and Mexico where low-end manufacturing takes place compared to say more commodity-dependent countries like Brazil and Russia,' said McNamara.
The Julius Baer BF Local Emerging fund rose 39.5% in the past three years. Its benchmark, the Cust Index JPM ELMI+, rose 17.2% in the same period.