Forget Greece & Puerto Rico; It's China That Worries Top Hedge Fund Managers

Jul 2 2015 | 4:32pm ET

By Jennifer Ablan (Reuters) - Greece's full-blown debt crisis and Puerto Rico's unfolding one have dominated headlines all week, but some of the biggest U.S. investors have China at the top of their worry lists.

Jeffrey Gundlach, Bill Gross, Dan Ivascyn, Mohamed El-Erian, and David Rosenberg are among the money managers keeping close watch of China where markets have been under severe selling pressure despite moves by regulators to restore confidence.

Chinese markets, which had risen as much as 110 percent from November to a peak in June, have tumbled more than 20 percent since June 12 in jaw-dropping volatility as money surges in and out of the market.

Shanghai's benchmark share index plunged below 4,000 points for the first time since April on Thursday.

"We discuss China in detail at every strategy meeting and we continue to consider it one of several risks we need to keep an eye on," Dan Ivascyn, Group Chief Investment Officer at Pimco, one of the world's largest bond fund managers with $1.59 trillion in assets under management as of March 31, told Reuters on Thursday.

For his part, Gundlach, who oversees $73 billion in assets at DoubleLine Capital, said he bought "tons" of Treasuries and Ginnie Maes last Friday, partly because the Shanghai Stock Exchange Composite Index was "signaling trouble by collapsing after blowing off to the upside a la the Nasdaq back in 1999/2000."

In fact, the U.S. Treasuries rallied strongly on Monday, with yields falling to one-week lows, with new developments and concerns about Greece and Puerto Rico.

In past years, Gundlach has said the Shanghai Composite was a leading indicator of U.S. stocks. "Like I've said, Shanghai 2014-15 is like the NASDAQ 1999-00," Gundlach said on Thursday.

Gross, the legendary investor who has been long referred to as the 'Bond King,' raised warning flags again this week about the risks in China.

In his Investment Outlook report on Tuesday, Gross said China was one of several events that could precipitate a run on the "new" U.S. shadow banking system, which includes mutual funds, hedge funds and ETFs which are modern banks that are not required to maintain reserves or even emergency levels of cash.

"China – a riddle wrapped in a mystery, inside an enigma," Gross wrote. "It is the 'mystery meat' of economic sandwiches – you never know what's in there. Credit has expanded more rapidly in recent years than any major economy in history, a sure warning sign."

For years, prominent shortsellers like Jim Chanos of Kynikos Associates, have warned about a property, debt and investment bubble bursting in China only to see government officials engineer an economic soft landing.

Yet Gross said investors should still hold an appropriate amount of cash "so that panic selling for you is off the table."

El-Erian, the chief economic adviser at Allianz, said he continues to recommend a "barbell" approach, where investors should stay mostly in cash on one end of a portfolio and illiquid assets such as infrastructure, a portfolio of selective tech startups and certain private market opportunities in emerging countries on the other.

"The stock market volatility is certainly notable in China," El-Erian said.

Rosenberg, chief economist and strategist of Canadian asset manager Gluskin Sheff added: "The country is undergoing a huge deleveraging at a time of lousy demographics and an ambitious rebalancing of the economy."

China's growth has slowed from as much as more than 14 percent in 2007 to 7 percent in the first three months of 2015, its slowest quarterly pace in six years. Ivascyn said Pimco has estimates of around 6 percent in economic growth for this year.

"China is a monster and is the world's second largest economy," David Kotok, chairman and chief investment officer of investment firm Cumberland Advisors in Sarasota, Florida. "It's not to be ignored, given how interconnected China is to global markets and economies."

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