03 July 2020
At GAM Investments’ Weekly Fixed Income Meeting held on 30 June, several managers discussed their views on the fixed income space across emerging and developed markets.
Paul McNamara – Emerging Market Debt
Emerging markets (EM) have had a reasonably strong reaction to the crisis, in our opinion. They are helped by favourable demographics; EM populations tend to be substantially younger than those in developed markets (DM). Stimulus in the developed world may also filter down to assist EM economies. When the summer ends, though, there is a risk of a second wave of infections due to the colder weather and increased time spent indoors. There is also further downside risk due to partial lockdowns following premature reopenings in certain areas of the world, as we have seen in some states in the US. Any chance of a resurgence of the virus will be a negative in both EM and DM. In our view, a large part of the EM universe should be able to finance themselves, and the current positive developments might continue to evolve.
Alex McKnight – Global Debt
Realistically, we believe duration is limit bound in the current environment. There is very little upside to developed government bonds, but central bank support could lead a rally in the event of any risk off sentiment. As far as risk markets are concerned, we believe the wide credit market, particularly in the BBB/BB area is a reasonable hold here – but we remain wary on equities. While central bank support can maintain the credit market and avoid refinancing risks, we are concerned about the growth outlook and its potential to spur equities higher. We understand the pent up demand that is believed to exist, but many one-time purchases by the consumer are essentially lost forever. This may lead to an initial pop in growth, but it would not lead to a back filling of what was lost.
Rahul Mathur – Global Rates
Over the course of the past month, there has been a growing sense of positivity surrounding China’s domestic markets. This is particularly evident, in our view, in Chinese equities and copper. A stronger purchasing managers’ index (PMI) and the easing of trading restrictions have also contributed to the overall positive sentiment.
Data in Mexico supports the potential for further interest rate cuts, following the unanimous 50 bps cut last week. Elsewhere, inflation markets have demonstrated more resilience than anticipated, partially due to the stickiness of core inflation and, more recently, to the rebound in energy prices. The US elections are also a significant potential risk going forward into the second half of the year.
Tom Mansley – Mortgage-Backed Securities
MBS spreads continue to grind tighter and fears continue to subside. Capital continues to flow into undervalued sectors. There is a realisation that some assets will be troubled, particularly in the retail sector however, in many cases, Covid-19 merely accelerated long-term trends already in place. Our long-standing preference is for senior bonds in the non-agency residential MBS market.
Casey Goldmann and Jack Flaherty – US Credit
US high yield (HY) underperformed over the past week with investment grade (IG) spreads marginally wider. Weakness was in part driven by rising infections and states putting the brakes on reopening. The HY market also saw outflows and the Federal Reserve has shifted focus to buying individual IG bonds from previously buying ETFs, including HY ETFs. In addition, companies have become more creative with financing as the sheer scale of HY issuance in recent months has finally weighed on the market. News on states hitting the pause button on reopening will continue to dominate the headlines. When looking at data more carefully, US fatality rates are declining.
Florian Komac – European Credit
European IG spreads widened slightly in the past week, particularly in the leisure space. Nevertheless, spreads remains significantly tighter than after the initial Covid-19 widening. Among corporates, Lufthansa shareholders approved a EUR 9 billion rescue deal. Wirecard collapsed into administration in an episode which continues to reflect badly on BaFin, Germany's financial regulator. Bayer entered into an agreement to settle the legacy Monsanto matters, paying up to USD 10.8 billion for current and future Roundup claims.
In another sign of normalisation, the European Union (EU) decided that borders will be reopened to citizens from 15 non-EU countries, including China, subject to a reciprocal agreement. Going forward, we anticipate markets will trade sideways over the summer providing there are continued signs of the virus being contained. We await increased news flow around the US election.
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.