22 May 2020
At GAM Investments’ Weekly Fixed Income Meeting held on 19 May, several managers discussed their views on the fixed income space across emerging and developed markets.
Florian Komac – European Credit
Germany and France have agreed to support a EUR 500 billion aid package to help the European Union (EU) recover from the coronavirus pandemic in a major step toward tighter integration. If adopted by the EU, the funds would most likely be distributed as grants to member states and industries that have been hit hardest by the pandemic. That said, the topic of collectivisation of debt, either through the new suggestion or euro / corona bonds, remains divisive among the 27 member states, particularly in countries such as Austria and the Netherlands amid a euro-sceptic atmosphere. Brexit talks have also made headlines this week, with reports indicating ‘grandstanding’ and unrealistic expectations on both sides of the table. Concerns surrounding a ‘hard Brexit’ remain at the forefront of public consciousness.
Alex McKnight – Global Debt
At the present moment, the Federal Reserve (Fed) is outright buying AAAs, while AA falls somewhat by the wayside. This may provide an opportunity for investors who remain slightly risk averse, as credit spreads widen across the board. Across the corporate spectrum, new issuance continues apace, though concessions are much smaller than they were. Risk assets have done exceptionally well since the bottom in March – and now seem to be pricing in very little downside. That is not a sentiment I would agree with.
Adrian Owens – Global Rates
Higher beta currency markets such as Turkey and Brazil have improved amid the crisis, followed by those currency markets linked to oil, such as Norway. Mexico has also rallied following the central bank’s 50% rate cute, and the euro may benefit from the recent EUR 500 billion recovery fund announcement from France and Germany. Sterling, meanwhile, has performed poorly over the past week. In our view, we would not put much weight on the prospect of negative rates; however, our outlook for the pound remains cautious. Commodity-based stocks such as precious metals, on the other hand, are doing well in the face of underlying fears of inflation.
Casey Goldmann and Jack Flaherty – US Credit
Investment grade (IG) and high yield (HY) spreads have tightened, notably in the energy sector. With oil back in the USD 30 per barrel range (at the time of writing), the picture for the industry has improved. However, highly leveraged HY names remain under pressure and realistically need oil prices to be in excess of USD 45 per barrel.
New issuance overall has tapered off but remains strong. Memorial Day on 25 May is a US public holiday, meaning markets will be quieter next week. The medium-term outlook for new issuance is uncertain as many companies have already taken steps to boost their liquidity.
Paul McNamara – Emerging Market Bonds
The asset class is continuing to claw back Q1 losses and has so far had a solid month after a decent April. There has been a wide dispersion of returns across markets. The oil price bounce has been a factor in this regard. Overall, active managers are being presented with a greater opportunity set, and digging deeper into specific country responses and behaviours to Covid-19 could prove rewarding at this point.
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. May 2020.