At GAM Investments’ latest Fixed Income Meeting, held on 1 June, our managers shared their thoughts on inflation and discussed the recent strength of emerging market currencies.
Adrian Owens - Global Macro and Currency Fixed Income
While reflation themes remain important, we have, in recent weeks, focused more of our incremental risk on relative value trades. That said, the inflation data continues to surprise on the upside. Amid the global financial crisis (GFC) so-called ‘inflation surprises’ were sharply negative; and they did not positively overshoot thereafter. In contrast, there was no inflation undershoot during the Covid-19 pandemic and we are now seeing a large overshoot. While some argue this is simply transitory, we believe the fact that we still saw upside surprises indicates inflationary pressures are much more powerful than many economists had imagined and / or more widespread than previously thought. Also, though there may well be spare capacity, there are also numerous examples of supply bottlenecks implying that much of that spare capacity may be in the wrong place.
Markus Heider – Emerging Market Rates and FX
After a disappointing Q1, Q2 has been more encouraging so far for emerging market (EM) investors. EM FX has been a bright spot of late, helped by a more balanced acceleration in global growth (not merely US led) and continued EM export strength. Covid-19 vaccination rates are quite encouraging with progress now being made not only in the US and Europe, but also in select EM markets, particularly Chile and Uruguay. Other countries, including Malaysia and South Africa, are still somewhat behind with their vaccination rollouts, but overall things are improving. In addition, EM external surpluses are quite strong, helped by commodities strength. We remain cautious on duration, partly due to upside risks of inflation.
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 not a reliable indicator of future results or 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. 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 and are not necessarily held by any portfolio or represent any recommendations by the portfolio managers. There is no guarantee that forecasts will be realised.