05 June 2020
At GAM Investments’ Weekly Fixed Income Meeting held on 2 June, four of our portfolio managers discussed their views on current market conditions.
Alex McKnight – Global Debt
We continue to see a wall of new issuance on the back of Carnival and Boeing’s successful debt issuances. Overall, risk assets have rallied over the course of just a few short weeks. The investment environment remains volatile, however, particularly as the political situation in the US deteriorates. We feel that markets have reached a begrudging acceptance of the rally, and it remains to be seen if the positive sentiment will continue.
Adrian Owens – Global Rates
Oil has bounced back sharply over the last few weeks, which is reflected in the best performing currencies. The Mexican peso has been strong, while the Norwegian krone and Swedish krona lead in developed markets (DM). Looking ahead, the US dollar is showing some signs of fragility. The US yield advantage has largely gone and Europe is making progress on the fiscal front. Overall, the US fiscal position is arguably less sustainable than in many countries and was in poor shape going into the crisis. The upcoming elections and Trump’s current domestic problems are also a potential headwind for the dollar. Aside from the fundamentals, the technicals are also less supportive as a number of key currencies have broken below important levels. We feel the risks of a softer dollar are rising.
Casey Goldmann & Jack Flaherty – US Credit
New issuance remains strong in the investment grade (IG) space and prices of bonds continue to rally. Supply of IG bonds is up by 90% year-to-date, with issuance from US IG corporates crossing USD 1 trillion. There have even been oversubscribed offerings in the unloved retail sector, which is facing store closures once again due to civil unrest following Covid-19 shutdowns. Ultimately, we think it is prudent to rotate out of overvalued areas and move up in quality, even as higher rated IG yields have fallen a great deal.
Christof Stegmann – European Credit
An ongoing credit rally has led to IG spreads tightening by 11 bps in the past week, with the recovery spread across all sectors. In the high yield (HY) market, spreads have declined 75 bps with leisure, services, capital goods and automotives leading the way. Even so, European HY spreads remain 240 bps higher, on average, than the beginning of the year while IG spreads are 23 bps above levels seen at the start of 2020.
Meanwhile, the European Recovery Facility has progressed after fierce debates over grants and loans. It is proposed that a sum of EUR 750 billion be split between EUR 500 billion of grants for European Union (EU) member states and EUR 250 billion of loans. To finance repayments, the European Commission plans to introduce new taxes and demand higher contributions from member states. The next milestone will be the EU council meeting, set for 19 June.
Eurozone Manufacturing Purchasing Managers’ Indexes (PMIs) climbed 6 points up to 39.4 in May. On a country level, the largest recoveries were seen in Italy, Greece, France and Spain. Germany and the Netherlands lagged. These are some promising indicators on the economic side, although markets are waiting for services PMIs for confirmation of an overall economic recovery.
Paul McNamara – Emerging Market Debt
We believe emerging markets (EM) have the ability to improve in the face of the Covid-19 crisis. Demographics suggest that EM are in better shape than DM in terms of casualties, and economically weaker countries, such as South Africa, are moving towards recovery. Questions still exist concerning the ability of EM governments to finance themselves with the same strength as DM – in other words, without negatively impacting their own currency. That said, at the present moment, EM politics appear relatively healthy in comparison to what is currently happening in the UK and the US.
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. June 2020 .