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Weekly Manager Views

28 February 2020

At GAM Investments’ Weekly Investment Meeting held on 26 February, the speakers were Amy Kam, who discussed Asian bond markets and China’s transition towards a greener economy, and Atlanticomnium’s Patrick Smouha, who commented on the outlook for subordinated debt.

Asia Fixed Income

Amy Kam

  • Asian bond (and equity) markets have held up well in the face of the coronavirus outbreak. In the case of fixed income, we feel this reflects the large, liquid and institutional nature of that market. Interest rates in the region are accommodative and it is our view that China has monetary and fiscal options to overcome most near-term weaknesses.

  • China is rapidly addressing concerns with regard to pollution and sustainability, and is now the world’s second largest issuer of green bonds behind the US and ahead of France. We believe that China’s example will be followed by other economies in Asia. From an investment perspective, our approach to environmental, social and governance (ESG) is about maximising impact rather than simply minimising risk. We believe ESG is a secular trend that is here to stay and the underlying principles of ESG are something we passionately support.

  • We continue to exercise caution when evaluating China’s Local Government Financing Vehicle (LGFV) sector. This caution was previously based on the government’s ongoing deleveraging campaign and subsequent rising defaults in this sector. We believe the government’s current focus on fiscal stimulus should provide temporary support for this sector given the integral nature of LGFVs to infrastructure projects. However, as we have seen in the past, state support is not constant and it may be wise to maintain a degree of caution.

Developed Market Credit

Patrick Smouha

  • While it is difficult to assess the overall economic impact of the coronavirus, central bank policy is likely to remain ultra-accommodative with rates lower for longer, in our view. In this environment, the appeal of subordinated debt of financials should be amplified. It is our opinion that valuations remain attractive and the asset class provides a steady, high income from investment grade issuers with limited exposure to interest rate risk. On coronavirus, our base case remains that any economy weakness arising from the virus should be temporary and front-loaded.

  • From a credit perspective, recent Q4 earnings statements have been positive. HSBC, for example, reported a 40 bps increase to its common equity tier-one (CET1) ratio to 14.7%, above the requirement of 11.4%. UBS, meanwhile, said its CET1 ratio increased to a more solid 13.7% at the end of 2019, rising from 12.9% a year ago. We believe both results illustrate the continued strengthening of bank balance sheets, driven by regulation.

  • We continue to see strong performances among so-called grandfathered / legacy debt securities issued by banks and insurers under Basel II and Solvency I respectively. Prices are increasing as we are getting closer to the end of the grandfathering period. Over time, these bonds are becoming inefficient. Therefore, there is a lot of optionality in terms of issuers tendering or calling these bonds over the coming quarters / years at a significant premium to current prices.

  • As long-term investors in financials, our investment team conducts in-depth fundamental analysis of issuers, spanning both financial and extra-financial aspects. Several aspects of ESG have long been part of our analysis framework, such as considering the corporate governance of companies. We are also currently integrating ESG within our credit research and this process should be fully implemented within the coming year.

Important legal information
Source: GAM unless otherwise stated. The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. Past performance is no indicator for the current or future development. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice. Reference to a security is not a recommendation to buy or sell that security. The companies listed were selected from the universe of companies covered by the portfolio managers to assist the reader in better understanding the themes presented. The companies included are not necessarily held by any portfolio or represent any recommendations by the portfolio managers.
February 2020