GAIM USA: China hard-landing and emerging market viability stirs debate among managers

23 Jan, 2013

Debate about China’s hard-landing and the viability of emerging market economies hit full swing at GAIM USA 2013 in Boca Raton, Florida.

Patrick Woolf, founder and managing partner at Grandmaster Capital, a San-Francisco-based long/short equity hedge fund, was bearish on China. “China’s economy is unsustainable and its investment boom, which has been a major driver in emerging market growth, is also unsustainable. Eight years ago, people warned that the US housing market was in a bubble and overleveraged – and that is how one should look at China,” he said.

His negative sentiments come as China confounded doubters with the country’s fourth quarter GDP growth hitting 7.9%. However, Chinese naysayers point out most of this growth is attributable to government investment and infrastructure spending – initiatives which rarely deliver long-term sustainability.

Others, however, were quietly optimistic about China. “The China boom will last longer than most people think. They are a command economy so their government can have more of an impact on markets than other economies,” commented Mark Yusko, CEO and CIO at Morgan Creek Capital Management.

Emerging markets excluding China also sowed divisions among panellists despite emerging market hedge funds posting gains of more than 10% in 2012. One panellist highlighted many of the so-called “emerging markets” had in fact emerged, adding the focus should be directed towards frontier markets.

“I am very excited about the frontier markets or emerging markets 2.0. These small, emerging markets are where Brazil, India, China and Indonesia were 10 years ago. As a group, these frontier markets account for 15% of the world’s GDP whereas China comprises of 13%,” said Marko Dimitrijevic, founder and CIO at Everest Capital, a $2 billion hedge fund.

“While larger emerging economies are correlated with the developed world, there is much less correlation among frontier markets – for example, events in Colombia are unlikely to have an impact in Bangladesh. Many of these frontier markets are well diversified and offer opportunities for investors,” he added.

Nonetheless, some pointed out bullishness on emerging market economies was misplaced. Woolf said history had shown very few emerging market economies fully develop. “Apart from South Korea and Japan and some of the smaller Asian tigers, very few emerging economies have truly emerged,” he said.

GAIM USAChina hard landingemerging markets