Valuewalk has obtained Hugh Hendry's June investor letter in which he argues that the storm across financial markets isn't over yet.
Hendry, manager of the hedge fund Eclectica Asset Management, writes that higher U.S. yields drove up yields across global markets. Emerging markets were especially hard hit.
"Countries from Brazil to China are now dealing with a combination of money outflows, worsening current and fiscal accounts, depleting reserves and social unrest. The days of easy money are coming to an end. In Brazil for instance, the biggest emerging debt market, no company has been able to raise debt abroad since mid-May as borrowing costs soared to a four-year high in June, at 7.1%. Confronted with the biggest street protests since 1992, Brazilian authorities are now forced to engage with ramping inflation. The Bank of Brazil recently raised the benchmark SELIC rate to 8.5%, giving continuity to the world’s biggest tightening cycle and adding pressure on local businesses.
"Moreover with the on-going economic slowdown in China, companies and currencies of commodity producers that rely heavily on sales to China continued to weaken in June. This was particularly the case in Australia and Brazil where exports to China account for 29% and 16% of total shipments respectively. This structural weakness benefited our EM currency basket, which made a modest gain for the month but was outweighed by losses elsewhere in FX."
He also highlighted the liquidity squeeze and surge in Chinese interbank rates in June.
With all of this in mind he writes that "the storm that caused chaos across financial markets since May should not dissipate any time soon."
Hendry continues to be short China and emerging market currencies.
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