Emerging markets:
Move when others hesitate

The Bank’s ability to dampen market volatility has certainly been a comfort to fixed income investors; over the last month £ IG spreads have moved in a range of just 4bp and ended tighter than they started, which compares rather favourably to the 5% peak-to-trough swing in GBP-USD over the same period.

As autumn approaches, Head of Corporate Bonds Mondher Bettaieb and Portfolio Manager Claudia Fontanive-Wyss believe developed market corporate credit is entering a sweet spot. In this Viewpoint, they explain why.

The US government launches 2 new rules aimed at ESG and proxy voting. Individually they appear investor-first, but taken together may be seen as a political agenda to limit investor activism from social and environmental interest groups. We are concerned about the impact on effective stewardship.

There are still plenty of potential bumps in the road (Brexit, the US election, COVID-19 developments and so on) but the positive technical created by dwindling supply has the potential to push spreads tighter in coming months.

Global markets remain fragile despite improved economic growth and investor sentiment. However, attractive valuations, easy monetary policy, government stimulus and promising cyclical drivers suggest that this is indeed a good time to increase exposure to emerging markets.

The ongoing trade war and eroding U.S.-China relationship have been a catalyst for making it less attractive for Chinese companies to seek a public listing in the United States. The Chinese government is finally making good on promises to open up domestic markets to foreign investors. Additionally, Hong Kong and China are taking steps to make local listings more attractive, especially to high-tech start-ups.

Our summer holidays haven’t eased worries about a resurging pandemic, but the horror of the first wave and the ensuing lockdowns is gone. Financial markets have rebounded and battered economies have regained their footing. There are even hopes that Covid-19 may help bring about a “green recovery”.

We expect September to be relatively busy with new ABS deals, but there’s a very strong technical developing in favour of ABS and CLOs, which should help performance in the coming months.

A key factor in assessing the fundamental economic market environment at the start of September is the change in US interest policy: a reformulated inflation target. Against the backdrop of further economic support from central banks, our models take a short position in bonds and remain overweighted on equities, albeit to a lesser extent.