20 November 2020
At GAM Investments’ latest Fixed Income Meeting, held on 17 November, four of our investment specialists discussed their views on current market conditions following the US elections and positive Covid-19 vaccine developments.
Rahul Mathur – Global Rates
We continue to look for opportunities to re-engage in themes related to inflation and fiscal sustainability. Despite encouraging news on the vaccine front, infections in the US appear to be rising. Encouragingly, economic activity is accelerating and hospitalisation rates are lower than the March / April period. Higher US treasury yields since the start of November indicate the market may be looking through the current Covid-19 wave. In the near term, much depends on lockdowns and the ability / willingness of US lawmakers to implement additional fiscal policy. We do not expect to hear from the Federal Reserve until the end of the year and from a political perspective, the situation in the US appears somewhat frozen. In Europe, a European Council summit on 19 November could be significant in terms of the European Union (EU) and the UK reaching a Brexit agreement, with state aid and fisheries two remaining sticking points. In our view, there may be some complacency on the expectation of a deal.
Denise Prime – Emerging Market Rates
Results of the US elections and positive vaccine developments proved positive for risk assets and emerging markets (EMs) were no exception. JPMorgan’s GBI-EM Global Diversified Index has moved higher since the start of November, driven by FX. Currencies in Brazil, Colombia, Mexico, South Africa and Russia have performed strongly. The Turkish lira, which has been under pressure all year, is also sharply higher month-to-date. In an apparent shift in sentiment from President Erdogan, Turkey’s central bank governor has been replaced and the finance minister has resigned. As a result, the market is expecting more orthodox rate hikes. In Peru, political uncertainty and unrest over the past week led to a selloff in Peruvian bonds and the country’s currency (sol). A decision to remove the popular president Martín Vizcarra and install Manuel Merino as his replacement resulted in violent protests. A new president, centrist Francisco Sagasti, has now been elected, prompting a recovery in asset prices.
Christof Stegmann – European Credit
Investment grade (IG) corporate spreads were largely unchanged over the past week, high yield (HY) spreads were slightly wider, although leisure / travel corporates have benefited the most from positive vaccine news. On the political side, decisions by Hungary and Poland to veto the EU budget and coronavirus recovery plan will likely delay crucial funding to countries heavily impacted by Covid-19, such as Spain and Italy. In the meantime, the European Central Bank (ECB) bought EUR 30 billion of bonds last week, the highest weekly amount since June. The focus seems to have shifted towards stemming a vaccine-led rise in bund yields. Overall, the environment remains supportive for spreads. At a company level, BBVA has agreed to sell its US retail business to PNC Financial for nearly USD 12 billion. Santander also announced plans to buy the core European business and tech assets of Wirecard, the failed German payments processor.
Jack Flaherty – US Credit
The rotation occurring in stocks can also be seen in credit, with spreads in the leisure sector in IG, for example, tightening much greater than the general market. The same effect can be seen more broadly in the HY market, which has tightened over the past week. On the whole, we are witnessing a risk-on environment and strong appetite for yields. While we expect fresh US fiscal stimulus measures, details are still being finalised and the timing is uncertain. In our view, the worst case scenario is that the stimulus package does not arrive before the end of January, which is not a major issue but could result in some medium-term market volatility. Despite Covid-19 case numbers climbing across the US and new restrictions at an individual state level, hospitalisation and mortality rates remain low relative to the number of infections.
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. November 2020.