26 June 2020
At GAM Investments’ Weekly Fixed Income Meeting held on 23 June, several managers discussed their views on the fixed income space across emerging and developed markets.
Dorthe Nielsen – EM Credit
Emerging market (EM) bonds are performing in line with other credit markets. In general, stronger performance can be found in lower-rated names month-to-date, although there is substantial dispersion between companies at present. The primary markets, notably in Russia and Latin America, are picking up with some new high yield (HY) and investment grade (IG) deals. Debt restructuring is also occurring across airlines, hotels and gambling names in various markets. Overall, companies are continuing efforts to boost cash positions by issuing debt and cutting back on capex.
Denise Prime – Emerging Market Debt
By all accounts, trading volumes are fairly light, which may reflect the lower conviction levels and lack of inflows into the currency space. Hard currency has fared better in that respect. High yield has been performing well, albeit with a dispersion between different countries. Various risks remain in play, particularly as the US election returns to the forefront. Currencies such as the Australian dollar have outperformed the majority of emerging market currencies, and their continued outperformance might encourage inflows. A weaker US dollar could encourage inflows into the asset class.
Casey Goldmann and Jack Flaherty – US Credit
From a new issuance perspective, HY is picking up with strong market appetite for new deals as a great deal of cash continues to sit on the sidelines. The market remains buoyed by implied support from the Federal Reserve (Fed). Oil is moving up due to a rebound in economic activity and supply cuts which are helping the energy sector. Airlines, including American Airlines and United Airlines, are raising capital via equity / convertible bond offerings as their cashflow burn rates remain high.
Adrian Owens – Global Rates
In Norway, the central bank has revised up its interest rate forecasts. Previously, it was not anticipating any rate hikes over its forecast period to the end of 2023. It now expects to raise rates by 65 bps, with the first hike in Q4 2022. It has also revised up its GDP forecasts. Recent activity data have also been much better than expected in Norway. In currency markets, we note that with relative interest rates less of a differentiating factor, relative current accounts have shown an increased correlation with FX performance. Relative fiscal positions and fiscal sustainability are also proving to be an important driver of returns. The US dollar has bucked the trend to some degree, which is understandable given the Covid related stresses during March. However, looking ahead, the US credentials in terms of current account and fiscal sustainability are not supportive factors for the dollar.
Christof Stegmann – European Credit
HY has been performing better than investment grade, with the best performers in leisure, consumer goods and automotives. The EU prime ministers could not agree on the setup of the proposed European recovery fund; discussions with the ‘frugal four’ continue in smaller circles. The European Central Bank did a very successful TLTRO (targeted longer term refinancing operation) as an indirect subsidy for the financial sector to avoid a credit crunch. The flash Eurozone composite PMI for June 2020 increased to 47.5 after 31.9 in May, due to the relaxation of lockdowns in Europe. A strong recovery can also be seen in the UK. Meanwhile, in Germany, payments firm Wirecard has been engulfed by an accounting scandal, leading to its stock and bond prices collapsing.
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.