17 July 2020
At GAM Investments’ Weekly Fixed Income Meeting held on 14 July, three of our investment specialists discussed their views on current market conditions.
Rahul Mathur – Global Rates
We have continued to see positive sentiment surrounding Chinese markets, which is reinforced by the data; copper prices are above their January peak and iron prices are reaching a one-year high. We anticipate the rhetoric between the US and China will remain tense, but we do not believe the US administration would seek to undermine market sentiment in the lead-up to the election. Most reflation trades have continued to perform well. Inflation markets have held onto their gains in recent weeks, and gold has surpassed its 2011 peak. The global reflation or fiscal reliance theme should continue to benefit as headline inflation remains supported by supply-side disruption and the recovery in energy prices. Finally, there are encouraging signs of recovery from Europe, where the major economies have been successful in flattening their Covid-19 curves. There has also been a sharp increase in savings rates, without a material decline in income, which should be supportive of consumption appetite.
Romain Miginiac – Subordinated Debt
Amid an otherwise uneventful week in subordinated financials debt markets, US banks kicked off the Q2 2020 earnings season. As expected, loan loss provisions continue to be elevated as banks brace for a sharp recession and revenues from retail and commercial banking activities remain under pressure from low interest rates and lower activity from lockdowns. The bright spot of earnings was extremely strong capital markets revenues, which have more than offset additional reserve build-ups. For example, JP Morgan reported its highest quarterly revenue ever. Furthermore, the bank increased its common equity tier one (CET1) capital ratio by 90 bps over the quarter, which is supportive to subordinated debt holders. We anticipate similar trends for European banks, on top of which capital positions are likely to surprise to the upside. For example, Barclays expects an increase in CET1 to 14% due to regulatory easing, which should boost excess capital by GBP 3 billion to circa GBP 9 billion, reflecting resilience in a time of uncertainty.
Christof Stegmann – European Credit
European investment grade (IG) and high yield (HY) spreads were marginally lower last week. Within HY, financial services performed well while transportation lagged. The European Central Bank (ECB) purchased EUR 25 billion of securities last week, the lowest amount in six weeks. This slowdown may reflect a new ECB approach of not buying aggressively to stabilise markets in periods of relative calm, instead keeping powder dry for the next bout of market turbulence. The European Council will meet in Brussels at the weekend with the recovery and resilience facility high on the agenda. Major disagreements between member states over the recovery fund have yet to be resolved.
In the corporate sector, Italian infrastructure group Atlantia will exit from its motorway unit Autostrade, allowing state lender CDP to take a majority stake in the business. The decision is a result of a dispute with the government on Atlantia’s highway concession to operate tolls following the fatal collapse of a Genoa bridge in 2018.
Important legal information 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. July 2020.