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Weekly Manager Views: Global macro & EM debt

15 June 2020

At GAM Investments’ Investment Town Hall held on 10 June, Michael Biggs discussed his views on current market conditions.

Michael Biggs  

  • We believe the outlook for risky assets depends to a large extent on developments in the risk free interest rate and the outlook for growth. Central banks have cut interest rates sharply, but for risky assets to rally in a sustained fashion the market would likely need clarity on the growth outlook. The global economy closed down in Q2 and is expected to re-open in Q3, so we feel a strong rebound in growth is likely. However, the rebound is already in expectations and therefore also in asset prices. US growth is expected to be +15% QoQ SAAR in Q3. While this sharp recovery may seem very reasonable as a baseline scenario, we see significant downside risks in infections, global trade and bankruptcies.

  • Global infections appear to have moderated sharply in Europe, but they have only stabilised in the US and are still increasing in emerging markets (EM). Even if US infections do come under control through the summer, there remains the risk of second round infections when winter returns towards the end of the year. If countries are forced to lockdown again on the back of a spike in infections, the growth recovery will be weak.

  • In China, the rebound has been very strong so far upon the gradual reopening of the economy in Q2. We believe this bodes well for the rest of the world in Q3. Initially, only production recovered, but subsequently services have strengthened as well. However, there are still risks associated with global trade. Chinese exports to the US and Japan are above 2019 levels, even though demand in both those countries is substantially weaker. If Chinese exports slow in the coming months, production is likely to follow.

  • In the US, the large increase in household savings suggests there is considerable pent-up demand, and increased spending would support the rebound when the economy opens up in the coming months. That said, bankruptcies continue to increase, and bank lending has started to decline. These risks could lead to a disappointing rebound that would hurt asset prices.

  • The impact of these risks on growth will only be known in time. While the growth outlook remains uncertain, the impact of these shocks has been clearly deflationary in the short term. Developed market core inflation has fallen for two months in a row, which is extremely rare. At the same time, central banks are doing whatever they can to boost growth. All these factors combine to create a potentially positive outlook for duration.

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. June 2020.