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Weekly Manager Views: Fixed Income

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At GAM Investments’ latest Fixed Income Meeting, held on 15 June, our managers shared their thoughts on inflation and discussed the variation in strength of local emerging market currencies.

18 June 2021

Rahul Mathur – Global Rates

It is perhaps not surprising to see recent inflation overshoots ignored by the market. Temporary factors relating to areas such as oil, food and used car prices, as examples, have been fairly significant drivers. Over the next two to three months some year-on-year base effects should start to drop out of the annual inflation data and provide comfort to the transitory inflation crowd. In our view, the bigger issue will be that core inflation remains sticky and becomes more dominant over the remainder of this year and into 2022. Rent inflation is rebounding significantly due to soaring home prices and a surge in demand for accommodation in major cities. Healthcare is another area that could see rising inflation over the next six months as hospitals look to rebuild margins that were squeezed by the collapse in elective surgery. Ultimately, while inflation may behave itself in the short term, we believe durable drivers of core inflation later in the year may trigger a sustained increase in inflation expectations and wages.

Denise Prime – Emerging Market Rates

Emerging markets (EM) local debt is up circa 0.6% in June, albeit there are variations by country. Peru is down by around 4% so far in the month; this on the back of the presidential election, in which a radical-left outsider has claimed victory. In contrast, Brazil, a country that was lagging, is up circa 4%: Covid-19 is being brought under control and vaccination programmes are well underway, plus some of the concerns around fiscal policy have receded with growth improving. Although inflation is picking up, Brazil appears to have a proactive central bank, having already raised rates by 150 bps, and we are awaiting another decision from which we expect an increase of around 75 bps. While South Africa has performed well, given attractive yields, Covid-19 numbers are picking up and there is little evidence of a vaccination programme. A country that looks more attractive, in our view, is Russia, as it has promising fundamentals. From here we intend to be wary of any hawkish commentary from the Federal Reserve, as it could cause EM to come under pressure once more.

Important legal information
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.

Rahul Mathur

Investment Manager

Denise Prime

Investment Director

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