At GAM Investments’ latest Fixed Income Meeting, held on 4 May, our managers commented on macroeconomic data and the impacts of recent events in emerging markets.
Rahul Mathur – Global Rates
We are mindful of the seasonal effects in equity markets, with risk markets appearing vulnerable following a risk-on move in April. It was a strong month for equities, commodities and risk-sensitive currencies such as the Norwegian krone and Swedish krona – some of the strongest major currencies year-to-date. Looking ahead, we expect the summer season to be more mixed for risk assets; this is most likely due to a combination of holidays and a vacuum following the large dividend payments that tend to be issued in April. From a macro perspective, the more recent Purchasing Managers’ Index (PMI) data would suggest the risk backdrop is becoming more nuanced. When looking at the manufacturing PMI data in April, the ISM Manufacturing Index pulled back from the highs seen previously. While factory activity in the US remains exceptionally strong, there are signs supply chain bottlenecks are having a more meaningful drag on production and employment. We are seeing this in historically long backlogs of orders, historically low estimates of customer inventories and an acceleration in the prices paid component of the manufacturing PMI. While this is only looking at one data set, it does paint an interesting picture and might cause investors to scale back their more directional exposures in favour of more relative value opportunities.
Denise Prime – Emerging Market Rates and FX
April was a better month for emerging market (EM) debt and FX, with bonds helped by lower US Treasury yields and currencies aided by US dollar weakness. High yielders, such as Brazil and South Africa, performed well, as did some European markets, which benefited from a stronger euro. That said, when looking at economic data, including particularly strong EM export numbers, EM local currency debt and FX is still lagging while money has been flowing into EM equities and hard currency debt. In our view, this can partly be explained by specific recent EM events, including potential sanctions on Russia, a worsening Covid-19 situation in India, riots in Colombia opposing tax reform and an unexpected election result in Peru. In addition, EM central banks do not have the same flexibility to support their economic recovery in the way developed market central banks do. Our outlook remains largely unchanged. US Treasury yields remain contained despite strong data suggesting expectations are at least partly priced in. With European growth improving, this should also help contain US dollar strength and support for EMs over the coming months – provided inflation expectations do not surge higher.
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.