Investors have very short memories and the major economies of the world are not as strong as the markets would have us believe, Pedro Noronha, fund manager at Noster Capital, said Monday.
“Investors are acting as if 2000-2003 and 2007-2009 never happened, and the hot topic 'du jour' is, once again, emerging markets," Noronha wrote in a letter to investors.
"According to most sell-siders (who are paid to be bullish), emerging markets are the place to be because the developed world has gone ‘ex-growth’ and the only place an investor should have exposure to are the thriving emerging economies,” he wrote.
But investors should be very careful in this very crowded trade, Noronha added.
“The problem we see is that everybody is already in that trade and emerging market assets are at the highest relative valuation vis-à-vis developed markets that has ever been registered," he wrote.
"We are confident that a crack will emerge in China or another 'new' country sooner rather than later and when that happens, developed markets will be back en vogue. The market will likely continue to be erratic and may test investors’ nerves until an event occurs that will move the market out of its current range; and we fear this move could be to the downside.”
The fact that the Chinese government continues to manipulate the yuan's exchange rate, accumulating foreign reserves, while G20 central banks play "a tit-for-tat competitive devaluation game" creates gains for asset prices but also a minefield for investors, Noronha said.
“Commodities are increasing in value because the Chinese are buying these goods as if there was no tomorrow and equity prices are rising because fiat currencies are being debased and investors need to hide in an asset class that isn't as overvalued as commodities or bonds,” he wrote.
“To make matters worse, cash is not safe anymore because our central bankers have decided to print a seemingly never-ending supply of money,” Noronha said.
