18 December 2020
At GAM Investments’ latest Fixed Income Meeting, held on 15 December, our investment specialists discussed European credit, emerging market currencies and the outlook for subordinated debt as we approach 2021.
Christof Stegmann – European Credit
European credit spreads in both the investment grade (IG) and high yield (HY) segments have weakened in recent days, with healthcare, consumer goods, media and services suffering the most. CCC-rated bonds were the worst performers. There were two major events for the European Union (EU) during the past week. First, leaders agreed to pass the budget for 2021 and the coronavirus recovery fund after holdouts Hungary and Poland lifted their objections. This is a major relief to countries, particularly Italy and Spain, as it allows for the distribution of grants and loans to facilitate the recovery in member states starting in 2021. Second, the European Central Bank (ECB) upsized the Pandemic Emergency Purchase Programme (PEPP) by EUR 500 billion to EUR 1.85 trillion and announced three new tranches of targeted longer-term refinancing operations (TLTRO), the bank lending programme with very favourable terms, and an extension by 12 months to June 2022, mainly to support the banking system. Such actions are positive for risky assets and should be supportive for credit spreads over the coming months. Finally, following numerous absolute deadlines, we remain without a full resolution to Brexit negotiations.
Denise Prime – Emerging Market Rates
JPMorgan’s GBI-EM Global Diversified (GD) Index is up so far in December and has returned to positive territory in year-to-date terms. A broad commodities rally has driven recent FX outperformers, including Chile, Colombia, Russia and South Africa. Brazil (FX and bonds) has also performed well so far this month following a change in tone from the central bank, which had been dovish, but has responded to a pickup in inflation by modifying its forward guidance. Overall, the backdrop remains positive for emerging market currencies and fixed income, helped by vaccine rollouts. We favour high yielders with solid fiscal positions.
Romain Miginiac – Subordinated Debt
We are constructive on the subordinated debt of high-quality financial issuers heading into 2021, supported by the prospect of a cyclical recovery, strong vaccine candidates, receding tail risks on the geopolitical front and central banks remaining extremely accommodative. Valuations remain attractive in a record low interest rate environment, and we believe subordinated debt offers value for investors that need to capture income but are unwilling to compromise on credit or interest rate risk. Our focus remains on high quality issuers given uncertainty around the long-term impact of Covid-19 and remaining geopolitical risks.
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. December 2020.