02 April 2020
At GAM Investments’ Weekly Fixed Income Meeting held on 31 March, three of our portfolio managers discussed their views on current market conditions.
Adrian Owens – Global Rates
Investors’ initial reaction to the coronavirus was to sell US breakeven inflation on the view that weaker demand would reduce inflation pressures. Inflation expectations then took a further and sharper lurch lower as oil prices sunk. At the lows, US 10-year breakeven inflation was below 0.6%. This implied that investors expected US inflation to average 0.6% a year for the next 10 years – we believe the risks are that it will be meaningfully higher.
Much is being done to mitigate the drop off in demand experienced by the global economy but there remains a great deal of friction throughout supply chains. Once lockdown phases have ended, we expect authorities to be slow to pull back from the fiscal and monetary easing they have put in place. Behind the scenes, high debt levels are worsening. For authorities to solve the debt conundrum, inflation may therefore be the only tool.
When markets calm, investors may start to consider which countries are in a position to provide such extraordinary fiscal support. The US is not in a healthy place in terms of debt levels and such a position may lead to a weaker dollar. Scandinavian currencies, though, should be in better shape as countries such as Sweden and Norway are able take on extra debt and finance spending. Meanwhile Mexico, where 30-year bonds are still yielding around 8%, looks interesting but risky. Overall, we believe we should see volatility levels gradually decline as the constant stream of negative news starts to abate.
Paul McNamara – Emerging Market Debt
Emerging market (EM) debt has moved beyond the first stage of the crisis, in our view, although it is still highly volatile with a strong downward bias. In fact, the drawdown on the asset class is now greater than it was in 2008. Amid the volatility, we have started to see some reasons as to why securities are trading as they are. EM central banks are stepping up and intervening. However, Brazil and Turkey look to have entered a fast growth phase of the pandemic, which is concerning. We believe the big variable is how late the US has addressed the coronavirus crisis; we may see a rapid rise in US casualties and lengthened lockdowns. The impact could skew the balance of the global economy quite significantly, in our view. With EM debt facing price falls and short squeezes, we find it difficult to view this as a buying opportunity just yet.
Christof Stegmann – European Credit
The intervention by the European Central Bank (ECB) on 18 March via the announcement of the Pandemic Emergency Purchase Programme (PEPP) was a game changer. This is a powerful, flexible mechanism allowing the central bank to take control of the sovereign and corporate yield levels and spreads until year end. The amount of liquidity this has generated, and which is already deployed into financial markets, has reduced the need to sell assets irrespective of price across all asset classes, EM hard currency bonds in EUR included. Leisure was the most impacted investment grade (IG) and high yield (HY) sector during volatile mid-March trading followed by automobiles and energy in IG and services and retail in HY. While valuations of certain bonds look attractive, eurozone purchasing managers’ indices (PMIs) for March look dire and service indicators are even worse. Overall, while we are more optimistic compared to two weeks ago, potential setbacks cannot be ruled out therefore we believe it is prudent to keep some powder dry.
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. March 2020