Goldman Sachs Asset Management’s bearish stance on China has paid off handsomely in recent days as authorities have devalued the renminbi.
Goldman Sachs AM’s Global Strategic Bond Fund was up between 20 to 25 basis points on Wednesday, with 20 basis points coming from the currency portfolio.
Speaking to InvestorDaily, Goldman Sachs AM investment manager for global fixed income management Sean Reynolds said the bond fund is short Chinese currency, the Korean won, the Singapore dollar and the Taiwanese dollar.
“We’ve been positioned in the past in two key ways to position around our view of China slowing and the need for ongoing stimulus,” Mr Reynolds said.
The first is currency, and the second has been a short position in the derivatives space.
Because the Goldman Sachs AM bond fund is a ‘cash plus’ portfolio there is no starting point to underweight, Mr Reynolds said.
“To express that bearish and short view we have to take a short exposure via a derivative. And the way we do that is to buy protection,” he said.
Goldman Sachs AM trades five-year credit default swaps on China over the counter with a counterpart, denominated in US dollars, Mr Reynolds said.
“We pay for protection against [Chinese] default, but we don’t expect that China is going to default on that contract,” he said.
“But we do expect that the cost of that insurance will go higher. And the way that we benefit is if that indeed happens.”
The decision by the Chinese government to weaken the currency is likely a reaction to some “pretty poor export numbers” that were made public over the weekend, Mr Reynolds said.
“The agenda for China is to move to a less manipulated and more market-driven float,” he said.
“That means less intervention in where their currency sits. Part of that is they want to move to a point where their currency is more recognised as a reserve currency alongside the US dollar and the euro and the yen.
“Stepping back and having less manipulation is one way they can tick that box. But they’ve made this move for a number of reasons, but one of them is to look to help out the export sector by weakening the currency,” Mr Reynolds said.
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