Market reaction in China and abroad to China’s economic malaise has exceeded policy makers’ expectations, in our view. We believe further interest rate cuts and reductions in the RRR are on the horizon. Larger stimulus measures may also be needed to restore confidence and stem repercussions in China’s currency and the currencies of China’s trading partners. A glimmer of hope shone through in Tuesday’s trading as prices picked up on bonds of Chinese property companies. However, we will be watching for signs of health in the real economy as a test of policy success, signs that still appear elusive.
We remain cautious on emerging markets, particularly Asian currencies and credits. The position-driven movements in global markets since the renminbi devaluation two weeks ago have created some attractive opportunities in some markets where the fundamentals are positive but corrections have driven spreads higher. Invesco Fixed Income favors domestically focused US investment grade and high yield securities. Spreads are attractive and the fundamentals of the US economy remain solid, in our view.
The risks of investing in securities of foreign issuers, including emerging market issuers, can include fluctuations in foreign currencies, political and economic instability, and foreign taxation issues.
Investments in companies located or operating in Greater China are subject to the following risks: nationalization, expropriation, or confiscation of property, difficulty in obtaining and/or enforcing judgments, alteration or discontinuation of economic reforms, military conflicts, and China’s dependency on the economies of other Asian countries, many of which are developing countries.
Fixed income investments are subject to credit risk of the issuer and the effects of changing interest rates. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. An issuer may be unable to meet interest and/or principal payments, thereby causing its instruments to decrease in value and lowering the issuer’s credit rating. The values of junk bonds fluctuate more than those of high quality bonds and can decline significantly over short time periods.