09 April 2020
At GAM Investments’ Weekly Fixed Income Meeting held on 7 April, four of our portfolio managers discussed their views on current market conditions.
Adrian Owens – Global rates
Hits to supply chains, a likely increase in protectionism and onshoring, shifting functions from policymakers and increasingly high levels of sovereign debt means, in our view, that investors need to be increasingly mindful of medium-term inflation risks.
Fiscal sustainability is a related medium-term theme. If markets start to focus on fiscal sustainability, US and UK currencies may come under greater pressure in our view. 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. Much hard work has been done to protect the economy and policymakers will not want to jeopardise that by being too hasty.
Denise Prime – Emerging market debt
Slightly more encouraging news around the coronavirus outbreak in Europe has meant the tone across markets has improved at the start of April. We have seen central banks in South Africa, Peru and Hungary (among others) announce plans to support their respective bond markets, but we remain cautious overall. The fiscal implications of stimulus are a bigger issue in emerging markets (EMs) versus developed markets (DMs). We expect to see large fiscal deficits in countries such as South Africa and Brazil.
Alex McKnight – Global credit
We believe that while initially deflationary, there will be an upward rise in inflation across the board. In terms of pricing, credit has lagged equities but still performed relatively well. While the recovery still has some way to go, we believe US and European high yield (HY) debt both look reasonable value at present. Collateralised loan obligations (CLOs) and non-agency mortgages look attractive given the sell off in the areas relative to the underlying risk. We believe the eventual recovery will be led by developed markets. EM will be lifted, but I don’t expect it to perform quite as well.
Casey Goldmann – US credit
Despite the market disruption, we are still witnessing select HY new issuance which we believe is a positive sign and investment grade (IG) issuance has been strong. In the energy market, higher quality bonds have performed well since the start of April, but lower quality names continue to struggle and unfortunately we believe bankruptcies could occur in this segment. The Federal Reserve (Fed) has been active in the IG market and has expressed a willingness to continue providing support. Performance of credit in general has lagged stock markets. There is an overhang in the market but we believe there is room for credit to catch up with equities. Markets continue to focus on confirmation of the coronavirus outbreak plateauing, and we believe New York will be the key lead indicator for US markets.
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. April 2020