Europe’s largest asset manager Amundi is moving out of US assets in favour of China, attracted by the country’s brighter economic prospects, better valuations and a more benign outlook for inflation.
Vincent Mortier, chief investment officer of the Paris-based fund firm, which has €2.1tn in assets, thinks “too much risk” is priced into Chinese credit and high-quality companies, while markets in the US are “too optimistic” as a recession looms.
“In our allocations we have made a clear shift from west to east,” Mortier said in an interview with the Financial Times, predicting that the US economy will not grow next year while China, India and Indonesia will each grow by 5 to 6 per cent.
Mortier’s bullish stance on the world’s second-largest economy comes as political tensions between Beijing and Washington worsen and recent consumer and industrial activity has fallen far short of expectations.
In late January, a top US air force general predicted that the US and China would probably go to war in 2025, and the following month Chinese spy balloons were discovered over the US.
While Mortier sees geopolitics as “a risk”, he thinks the balance of power is such that the US would try to avoid being too harsh on China. Amundi has been gradually increasing its allocation to China and India over the past 12 months, and has accelerated the move this year.
“The US should not underestimate the capacity of China to retaliate, to escalate and then to negotiate,” Mortier said. “I think China can make serious arguments to put pressure on the US as well.”
Mortier is particularly keen on opportunities in select Chinese corporate bonds, arguing that foreign investors have been blanket selling without differentiating between the quality of issuers.
“If you dig you can find really good companies that you can buy for 50 cents to the dollar,” he said. “If you are brave or if you have some time it’s very good.”
Amundi’s optimism on China comes despite a tough period for its equity markets. The CSI 300 index has shed 5.7 per cent from its January peak.
Markets have been pushed lower by disappointing economic data. Although China’s economy grew by a better than expected 4.5 per cent year on year in the first quarter, industrial production rose 5.6 per cent last month from a year earlier but well below forecasts of a 10.6 per cent rise. Retail sales figures also missed forecasts. But Mortier said he believed investor reaction might have been overblown.
“The data may seem disappointing, but when you dig more into the details in fact they are not that bad,” he said. “I think the markets may have not caught the reality of what is happening because there have been changes in how the data is produced.”
US markets are pricing in a “goldilocks” scenario of low inflation, rate cuts, stronger earnings and a soft landing, but the likelihood of this happening is becoming increasingly remote as financial conditions tighten, he said.
The US Federal Reserve’s quarterly Senior Loan Officer Opinion Survey last week showed that 46 per cent of US banks plan to raise their lending standards owing to worries about loan losses and deposit flight.
Meanwhile, hourly wage growth was 4.4 per cent year on year in April, which is likely to put upward pressure on inflation.
Mortier thinks inflation in both the US and Europe will stabilise at around 3 to 4 per cent in the years ahead, but with some volatility that will make the Fed’s job particularly difficult owing to the time it takes for monetary policy to have an impact.
However, he is not worried about the possibility of a US debt default, which has sent the cost of insuring against US Treasury default soaring this year to its highest level since the financial crisis.
“We think Treasuries are safe,” he said. “We are continuing to manage this exposure like business as usual and even taking some opportunity” to buy some.
Nevertheless, he favours emerging markets over western markets as a whole and is upping allocation to both India and Indonesia where, like China, economic growth is becoming less dependent on exports.
“This is good news for these countries and less good news for the West,” he said.
Fund manager Amundi shifts assets from US to China
