11 September 2020
At GAM Investments’ Weekly Fixed Income Meeting held on 8 September, several of our investment specialists discussed their views on current market conditions.
Denise Prime – Emerging Market Rates
If you look at the actual components within the GBI-EM index, you can see a difference of performance. The European countries are falling in line with the euro, but looking at the more risk-on currencies such as South Africa, Brazil and Mexico, those are actually up over the month. Despite the volatility experienced by the US dollar, emerging market (EM) currencies appear to have performed reasonably well. Recovery in inflows has yet to be seen; although Q3 data has been encouraging, there is still uncertainty in the markets. Following the quiet month of August, investors may now been reassessing their portfolios and looking for attractive economies for diversification.
Amy Kam – Asian Income
We are constructive with the medium to long-term economic outlook, supported by a strong China recovery. Commodity price recovery on the back of China’s resilient growth helped broader EMs. China has an increasing focus towards a circular economy narrative and domestic consumption, as tensions with the US escalate. The coming US election will be closely watched. A Biden win will reduce uncertainty, as we may expect less Twitter based ad-hoc policy. The degree of US-China decoupling will also dictate the pace of China’s growth. H1 corporate earnings in Asia unsurprisingly pointed to increased gearing and revenue drops. It is too early to conclude whether there is permanent damage to corporate balance sheets, and this will be closely monitored. That said, liquidity profiles remain strong. 83% of Chinese property companies reported year-on-year growth in contract sales in the first eight months of 2020.
Rahul Mathur – Global Rates
The first week of September seemed mainly about a reversal of recent trends. The dollar rallied almost instantly after EUR/USD finally broke above 1.20. Core bond curves bull flattened. Most notably, the S&P 500 had its worst week since June and its tenth worst trading day in 2020, with weakness led by the tech sector. Last week’s Purchasing Managers’ Indices (PMIs) were not especially disappointing, but they did highlight that the early cycle acceleration has come to an end. Historically, this has mattered for risk assets. Growth-linked assets tend to follow PMI cycles and perform best when the PMI cycle is accelerating. This is no longer the case.
Fiscal policy fatigue is also a big problem, especially in the US. US treasury outlays are collapsing and there is next to no market focus on this. Congress reconvenes this week, although with the election looming, a deal for new fiscal support is looking less and less likely.
The US is coming off the Labour Day holiday, with a UK-generated global risk aversion. Growing concerns around a “no deal” Brexit have provoked further sharp weakening in the pound sterling and a rally in UK rates and break-evens.
Market volatility is also picking up, with US VIX levels at the highest level since June and US technology stocks see another leg lower. Oil is experiencing its biggest sell-off since the recovery in the spring.
Jack Flaherty – US Credit
August was a fairly quiet month for US credit as deal flow slowed. However, we anticipate new issuance will pick up significantly over the next few weeks. This could lead to greater volatility and attractive entry opportunities. The US election continues to hang over markets and any uncertainty surrounding the result would clearly be unwelcome.
Christof Stegmann – European Credit
August was a fairly calm month. In the investment grade (IG) credit market, spreads were lower across all sectors. Spreads went down even more in the high yield (HY) market, with utilities and telecoms the main laggards. In France and Spain, August manufacturing PMIs declined month-on-month, while Germany and Italy were weaker on the services side. The UK proved to be the outlier, with PMIs solidly on the rise. This could change, however, given renewed discussions on a non-deal Brexit.
The European Central Bank (ECB) has slowed down its asset buying, with EUR 17 billion purchased last week - 85% of that under pandemic emergency purchase programme (PEPP). In our view, the slowdown can be explained by reduced liquidity and issuance in August and is not a sign of reduced commitment.
In the corporate space, two Spanish banks (Bankia and CaixaBank) are in talks to merge. Such a deal, if successful, would create the country's largest lender. It could also be an indicator of further consolidation in the European banking sector. Moreover, as Covid-19 impacts on banks become clearer, new merger candidates could appear.
Tom Mansley – Mortgage-Backed Securities
A supply and demand imbalance persists in the US housing market and home prices are appreciating. Meanwhile, US unemployment has reduced to 8.4% from +10% in July. In the mortgage market, delinquencies are occurring; however, the situation is stable. Last week the Centre for Disease Control and Prevention (CDC) issued an order prohibiting evictions of lower income individuals affected by the Covid-19 pandemic through to the end of the year. At the same time, mortgage refinancing is surging as mortgage rates hit new lows of around 3%.
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. September 2020.