Thursday8 August 2019 ★ FINANCIAL TIMES 19MARKETS & INVESTING
EVA SZALAYAsian currencies notched up broad-
based declines yesterday after central
banks in the region delivered larger
than expected rate cuts and warned of
mounting growth concerns.The dovish tonecaught investors off
guard, leadingto the selling of both
developed and emerging markets
currencies in the region with some,such
as the Australian dollar, “sinking in
sympathy” withpeers.
The New Zealand dollar fell 2 per cent
against the greenback to trade at its
weakest level since the start of 2016
after the country’s central bank cut its
key rate to a record low of 1 per cent.
The Reserve Bank of New Zealand
also signalled that further easing could
follow andhinted at unconventional
policy measures.
India’s central bank also trimmed its
base rate by more than investors
expected, cutting 35 basis points com-
pared with the usual 25bp increment,
while the Bank of Thailandsurprised
marketsby lowering its key rate.
The downbeat tone from the region’scentral banks cameamid worries about
global trade,sluggish economic data
and escalating Sino-US trade tensions.
In response, investors have sought the
safety of the US dollar and the Japanese
yen while currencies linked to risker
trades were sold, such as Australian and
New Zealand dollars and the South Afri-
can rand.
“Global central banks have delivered
with gusto over the past 24 hours...
for now, sentiment should remain rocky
and that should reinforce support ofsafe havens like the yen and the dollar,”
said Mark McCormick, global head of
FX strategy at TD Securities.
The Australian dollarfell to its lowest
levels against the greenback inmore
than a decade, “sinking in sympathy”
with its New Zealand peer,said Win
Thin, global head of currency strategy at
Brown Brothers Harriman, after the
country’s reserve bank kept itsrates
unchangedat historic lows on Tuesday.
The Indian rupee also declined
against the US dollar.
In China, officials fixed the onshore
renminbi’s rate at its lowest since 2008
but kept it below the key Rmb7 against
the US dollar level, which it breached on
Monday after the US announced addi-
tional tariffs on Chinese imports.
Officials from the People’s Bank of
China saidthe renminbi’s weaknesswas
unlikely to accelerate significantly, reas-
suring investors that authoritieshad no
intention of weaponising the currency
in response to the trade tensions.
“We find this to be, quite frankly,
unenforceable,” said Mr Thin. “If the
rest of EM FX is selling off, we can bet
the [renminbi] will as well.”Currencies
Surprise dovishness from central banks
triggers bout of Asian forex weakness
LINDSAY FORTADO— NEW YORKRay Dalio, founder ofBridgewater
Associates, the world’s largest hedge
fund, has made a resounding argument
for investing in China even as a trade
war between Beijing and Washington
appears to be escalating.In a video posted online on Tuesday, a
day after Sino-US trade tensionspread
to thecurrency markets, Mr Dalio said
there remained a historic opportunity
to buy into a country that is opening up
its markets to foreign investors over the
long term.
“Would you not have wanted to invest
with the Dutch in the Dutch empire,
would you have not wanted to investin
the Industrial Revolution and the Brit-
ish empire, would you have not wanted
to invest with the United States? I think
it’s comparable,” he said. “Would you
have not wanted to have invested in
those places?”
The billionaire hedge fund manager
has been a China bull for decades and
has repeatedly pointed to growth oppor-
tunities there. Bridgewater opened its
first office outside of Connecticut in Bei-jing in 2011 to be closer to clients there,
although it was not until more recently
that the Chinese market opened up to
allow foreign investors to launch
onshore funds. Bridgewater launched
an onshore fund investing in Chinese
securities last year.
The appearance of thehalf-hour
videoonline on Tuesday pointedly
invited investors to look past the latestround of trade tension, which had
rocked equity and bond markets
around the world since President Don-
ald Trump announced tariffs on $300bn
more of Chinese goods and Beijing
allowed its currency to weaken against
the dollar. Monday was the worst day for
US equities this year.
Bridgewater was also planning to add
a section to its websitethis week that
will be devoted to its research on Chinaand commentary on investing there.
“I believe China is a competitor of the
United States or Chinese businesses are
competitors of American businesses or
other business around the world and
that therefore you want to be, if you’re
diversified, having bets on both horses
in the race,” Mr Dalio said.
He said the two countries are unlikely
to go to “classic war” but added: “I think
there’s a restructuring of the world
order, in terms of changes in supply
chains, who’s making what technolo-
gies.”
In the video, Mr Dalio dismissed the
idea that investing in China now is too
risky. “I think Europe is very risky when
monetary policy is almost out of gas and
we have the political fragmentation and
they’re not participating in the technol-
ogy revolution,” he said. “I think the
United States is very risky in its own
ways, having to do with the combination
of the wealth gap, the political system,
the conflict between socialism and capi-
talism that will be part of our election,
the fragmented decision-making, so
many different things and the absence
of the effectiveness of monetary policy.”Asset management
Dalio stays bullish on China investing
despite escalating trade war with US
‘The US is risky in its own
ways, the conflict between
socialism and capitalismwill be part of our election’
The New Zealand dollar has hit its
weakest level since the start of 2016COLBY SMITH— NEW YORK
JUDE WEBBER— MEXICO CITYIn the days after Mexico’s president
Andrés Manuel López Obrador
announced his plans last month to
revive the debt-laden, state-owned oil
companyPemex, investors panicked
and ditched the company’s bonds in
droves.
Now, investors are nibbling at the
edges of Pemex again, ramping up expo-
sure despite the company’s mounting
liabilities and meagre oil output.
Since mid-July, yields on Pemex debt
maturing in 2027 have fallen nearly 50
basis points to 6.44 per cent, indicating
a rise in price. The cost to insure against
the company’s default has stabilised as
well, although it still remains near a
three-year high.
While the relatively elevated yield
underscores just how wary investors are
about Pemex’s future, overseas buyers
are increasingly tempted by what they
say are enticing prices.
“We have a window of stability in
Pemex and that makes Pemex attractive
given the valuations,” said one investor
who has begun snapping up the debt.
“Given the search-for-yield world,
Pemex is a huge pick-up versus the sov-
ereign, for what I personally view as
similar if not the same risk,” the investor
added.
Just weeks ago, Mexican assets
gyrated wildly after Mr López Obrador
underwhelmed investors with hisplan
to rescue Pemex,despite offering up bil-lions of dollars of tax relief andcash
infusions.
Few investors believed the plan went
far enough to resolve Pemex’s most
acute problems and most were resigned
to the view that other ratings agencies
might follow Fitch by slashing Pemex’s
rating to junk within the year.
“Pemex has repriced substantially
and the real question is not if they will be
downgraded but when,” said Penny
Foley, co-head of emerging markets at
TCW, an asset manager, who is under-
weight in Mexican assets.
One of the big concerns is the govern-
ment’s unwavering commitment to a
Pemex-led$8bn refineryproject in the
south-eastern state of Tabasco, which
many doubt can be built to budget
within the government’s three-year
timeframe.
Mr López Obrador’s aversion to pri-
vate sector involvement is also a worry
to some investors.
Pemex has ruled out deepwater
exploration, fracking and joint-ven-
tures with the private sector beyond
limited service contracts, in favour ofthe accelerated development of 20 shal-
low-water fields.
But the National Hydrocarbons Com-
mission, the sector regulator, has
already cautioned that those fields will
hit peak production by 2021.
“It’s a very short-term view that will
put the country in serious danger in
2022 if it doesn’t get extra production,”
said one former senior Pemex insider,
noting there had been scant emphasis
from Pemex on reserve replacement to
underpin future output.
But some investors said there was
money to be made in the event of a
downgrade. “If [Pemex] is downgraded,
there is the possibility for a significant
amount of forced selling,” said Ms Foley.
“You can pick things up at more attrac-
tive levels.”
Gorky Urquieta, the co-head of the
emerging markets debt team at asset
manager Neuberger Berman, said there
would be an opening created by inves-
tors who can only hold investment
grade bonds.
“When the downgrade comes and if
the market reacts to forced selling, thatmay provide an opportunity to increase
our exposure,” he said.
Edward Al-Hussainy, a senior interest
rates and currency analyst at Columbia
Threadneedle Investments, said he was
not worried by the prospect of a forth-
coming ratings downgradebecause the
oil company is such an integral part of
the state.
“The unambiguous trend here is one
in which the government is stepping up
support for Pemex,” he said. “It is criti-
cally strategic as a source of investment,
as a source of employment and as a
source of government revenue, so the
government cannot divorce itself from
Pemex.”
Jens Nystedt, a senior portfolio man-
ager at Emso Asset Management, also
found comfort inPemex’s “full sover-
eign guarantee”.
As such, he may also step in and buy
Pemex after a downgrade.
Mr López Obrador, a leftist national-
ist, has made rescuing the 81-year old
company, which has $106bn in debt, an
issue of national security.
He wants energy self-sufficiency to
avoidrelying on the US for a substantial
portion of the country’s fuel needs.
Bailing out Pemex comes with a cost,
however. Investors warnany bidto bol-
ster the oil company will weigh on the
state’s fiscal health at a time when the
economy is on the brink of a recession.
Given the sluggish state of Mexico’s
economy and Pemex’s broader chal-
lenges, some investors were not yet
ready to take on the added risk.
“Pemex is a credit we want to own but
the trajectory is bumpy and the direc-
tion is pessimistic,” warned a portfolio
manager at one of the world’s largest
investment groups. “There’s no rush to
be overweight.”Elevated yields show wariness
remains but prices increasingly
seen as too enticing to resist
‘Wehavea
window ofstability in
Pemex andthat makes
it attractivegiven the
valuations’Investor pull:
Pemex oil rig
workers on a
platform in the
Gulf of Mexico
Omar Torres/AFP/GettyFixed income.Sovereign guarantee
Investors eye Pemex bonds
as a buying opportunity
Pemex pricing entices investors
Source: BloombergYield on Pemex bond maturing ( ) Mar AugRICHARD HENDERSON— NEW YORKOccidental Petroleumhas issued $13bn
in bonds to fund its takeover of
Anadarko, an acquisition that has pitted
famed investorsWarren Buffettand
Carl Icahnagainst one another.
Orders for the 10-part bond sale
swelled to $78bn by midday on Tuesday
in New York, according to two people
briefed on the matter, allowing under-
writers tolower the yield on the offering
compared with the initial guidance
released earlier in the day.
The strong appetite underscored
investors’ renewed interest in corporate
debt amid a global bond rally that has
pushed yields for government bonds
sharply lower.
The 10-year bond priced at 185 basis
points above comparably maturing US
Treasury bonds, down from the initial
guidance of 220bp.
This would peg the yield at about 3.
per cent. Occidental’s current outstand-
ing debt, maturing in 2027, yielded 3.
per cent as of Tuesday evening.
The effective yield on the ICE Bank of
America index of investment grade
energy debt was 3.52 per cent.
The more favourable pricing came
even after Moody’s, the rating agency,
last week downgraded Occidental’s
credit rating to Baa3, the lowest invest-
ment grade level.
Matt Brill, senior portfolio managerfor Invesco, said the US investment
grade credit market was set to see an
increase in buying byforeign investors
facing negative yielding government
debt.
“Foreign investors are hungry for
yield because of the negative yielding
rates in Europe and elsewhere, so we
think there will be a lot of demand from
those investors for new credit issuance,”
he said.
Proceeds from the deal will be used to
finance Occidental’s $55bn takeover of
Anadarko. The companies agreed the
deal in May after a bidding war involv-
ingChevron, which initially offered
$38bn.
The Occidental acquisition is set to
close later this year and expands the
group’s reach in the Permian Basin, a
centre of US shale oil production, where
Anadarko has drilling rights to 250,
acres.
The purchase was sealed when
Occidental secured funding from Mr
Buffett’sBerkshire Hathaway.
Under the terms of the deal, Berkshire
will invest $10bn in Occidental in
preferred shares with an 8 per cent
dividend, above market rates.
In May, Mr Icahn filed a lawsuit
against the oil company, claiming the
deal was “fundamentally misguided
and hugely overpriced”.
Occidental shares have traded lower
since the deal was announced in May,
indicating that investors share Mr
Icahn’s concerns that the oil major over-
paid for Anadarko.Fixed income
Occidental’s
$13bn debt
sale draws
heavy demand
‘Foreign investors are
hungry for yield because
of the negative rates inEurope and elsewhere’
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