15 January 2021
At GAM Investments’ latest Fixed Income Meeting, held on 12 January, our investment specialists discussed developed and emerging market currencies, fiscal sustainability and the US housing market.
Adrian Owens – Global Rates
We see four key areas of opportunity over the coming year. First, we continue to favour currencies that typically perform in a reflationary environment. Examples of this include, among others, the Australian dollar and Norwegian krone. We see little more than, at best, coupon returns from interest rate markets. Second, in terms of inflation protection, US inflation break-evens are our favoured expression of this view. Although we anticipate a strong reflation dynamic in the second half of the year, several assets are already going some way towards pricing this in. We expect to see investors increasingly differentiate within asset classes with a growing focus on value – our third key theme. We see most interest rate opportunities in relative value trades. Finally, on the topic fiscal sustainability, several countries responded with fiscal largesse at the start of the Covid-19 pandemic. We believe this will become increasingly difficult to sustain and those economics with sound, sustainable finances are likely to see their currencies and interest rate markets respond accordingly.
Denise Prime – Emerging Market Rates
Higher yields in the US have been accompanied by a stronger US dollar in recent weeks, pressuring emerging market currencies, notably the South African rand and Brazilian real. A combination of factors, including a Biden ‘blue wave’ and a resurgence of Covid-19 cases in Europe, have led to a shift in growth expectations in the US. Ultimately, despite short-term EM weakness, we believe the outlook for the asset class is positive. The deployment of vaccination programmes around the world should enable economic activity to normalise in 2021, supported by fiscal initiatives and low interest rates.
Tom Mansley - Mortgage-Backed Securities
Spreads in the US residential MBS market remain wider than pre-Covid levels, in contrast to many other markets. Debt service ratios are at record lows and US unemployment is back below 7%. Meanwhile, demand for homes is solid and there is a record low supply of existing homes available for sale. Since there is still a shortage of housing available for sale, we expect house prices to be well supported, although we expect the rate of increase in house prices to be lower during 2021 than last year. Overall, the US residential MBS market is weathering this economic storm well.
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 of current or future trends. 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 securities listed were selected from the universe of securities covered by the portfolio managers to assist the reader in better understanding the themes presented. The securities included are not necessarily held by any portfolio or represent any recommendations by the portfolio managers.