El mercado de renta fija, bajo la lupa

Chris Iggo, e AXA IM. - Lunes, 04 de Septiembre

• 
• 
• 
• 
• • 
  • 
  • 

The fact that the global economy remains firmly in an expansion is the core reason why financial market volatility is low. Yes there are spikes related to missile tests or barbed tweets, but fundamentals remain supportive mostly. Looking to the end of the year the main driver will be policy decisions taken, or not taken, by central banks and the Congress. Given the cyclical position of the global economy, higher rates remain a plausible expectation and the return profile for government bonds is negatively skewed. But the lessons learnt from watching central banks are that they won’t do anything to shock markets. If the Federal Reserve (Fed) is going to hike rates again this year it needs to get out and massage market expectations. More work will need to be done around explaining balance sheet reduction. It is not likely that anything from a policy perspective will raise recession concerns any time soon. Still, I followed up on the phenomena of something bad happening in years ending in seven. In 1977, 1987, 1997 and 2007 the US stock market suffered a negative return in the period October to December. Still it needs something to trigger people to sell and that something is not going to be a recession.   

      

·         Carry on – Many analysts currently write about financial markets displaying signs of “late-cycle behavior”. I am not going to take issue with that but it’s difficult to see, at the macro level, any signs of an impending recession. In most economies, the expansion has been tepid compared to previous cycles given the drag on investment and spending from the need to restore balance sheets and reduce debt. It is little wonder that animal spirits have not been in abundance when the guidance from central banks has generally been one of caution in removing the monetary accommodation that was put in place following the crisis. However, slow growth does not necessarily mean we are heading to negative growth anytime soon. The fact that interest rates remain close to zero almost everywhere in advanced economies is one key reason for that. Recessions are normally trigged by a tightening of monetary conditions or some kind of external shock like an unexpected spike in oil prices or a political shock.  

·         Records – It may not be politically correct to say it, but generally the world economy is doing well. Doing well in terms of activity levels and financial market performance (which has wealth effects of course). It may not be doing well in terms of equality and real income growth but those factors don’t cause recessions. They are important over the longer term and have been responsible for the upturn in “populist” politics in recent years but beyond the political discourse, unemployment has been moving lower, corporate earnings have been growing and technological innovation has continued to change businesses and markets, generally for the better in terms of efficiency and productivity (I don’t see the use or relevance of aggregate productivity data and certainly don’t believe they tell us anything about how modern day economies evolve). As far as cyclicality goes, there is not much flagging an immediate downturn. I have a very useful spreadsheet (believe me) that plots a number of macro data series over time and includes on it those periods of recession in the United States. Employment trends are still positive relative to previous slowdowns, real rates are not positive, indicators of activity like the Institute of Supply Management (ISM) industrial surveys are still strong, and the housing market is buoyant. The US economy remains on track for a record period of GDP growth.       

·         Spikes – The low level of concern about an imminent end to the global expansion is a key reason why volatility levels in financial markets remain so low. They do occasionally spike higher but the spikes are generally triggered by bouts of concern over policy or geo-political events. Not that these are unimportant. A military conflict between the US and North Korea, for example, would itself have negative effects on the US economy. That, hopefully, is unlikely but occasional bouts of rhetoric are bound to impact on financial markets. Similarly when expectations of policy moves are not met with action, sentiment towards different financial assets can be affected. Tax reform in the US is a good example. The run-up to the debt ceiling debate will be another, although the need for Federal financing of the recovery needs for Texas should ensure that there is bi-partisan agreement on raising the limit on borrowing. The point is that investors need to differentiate between short-term bouts of volatility triggered by political events or policy discussions, and a longer-term change in the underlying fundamentals. My concern about credit, for example, is one that has its roots in current valuations and the asymmetric outlook for returns. It is not yet based on any real evidence of a deterioration in underlying macro or corporate trends.               

·         Emerging leading – Until there are reasons to re-assess the economic outlook it makes sense to expect a continuation of return performance across asset classes. In the bond market that suggests that emerging market debt continues to be one of the best performing asset classes. So far this year, hard currency emerging market debt has delivered a total return of close to 10%, driven by a recovery in economic performance in many of the large emerging economies (Brazil, Russia), strong commodity prices and a more benign US dollar environment. Interestingly, while developed market high yield sectors have seen a deterioration in return performance, emerging market debt has still been very rewarding. At the index level, a spread of almost 300 basis points (bps) for emerging market debt compares very well with a spread of 385 bps for US high yield and 288 bps for European high yield, given the ratings differentials and greater diversification offered by an emerging market strategy that invests in investment grade and high yield, corporate and sovereign bonds across a wide range of countries. The difference in credit spreads between emerging markets and US investment grade corporates, for example, was much narrower in 2012-2013 than it is today, providing some room for emerging market debt to continue to outperform.

·         Higher rates (yawn) – For most of the year credit driven assets have been the best performers in the bond market. That was not the case in August. Government bond yields have generally moved lower over the summer, displaying again the default position of the bond market in terms of not-believing that central banks are close to accelerating normalisation. Market prices don’t suggest any further Fed tightening this year and much of the European bond market continues to trade with negative yields. The rates complex remains the biggest source of risk to bond investors as it gets even more incongruous to have zero or negative interest rates when global growth is broad based and when inflation is, at least, north of 1% in most places. Given where we are in the cycle, and notwithstanding the valuation of credit markets, a sequence of higher rates then wider credit spreads remains the most likely path to a bond market adjustment. The problem is that we have said this for ages but the process of exiting quantitative easing (QE) has been glacially slow.

·         Sad sterling – It has been a slow summer. Markets have been quiet. Now we enter September and the noise levels should pick up at least. Will these mean a change in trend? It’s boring but it does depend on policy makers. Away from that, the currency markets have provided some interest with the euro reaching its highest levels versus the dollar since the beginning of 2015. Meanwhile, British visitors to Europe face the most expensive tourist exchange rates against the euro since it was created. That tells us that the euro is strong but also that sterling is weak and, I’m afraid, that this trend is likely to continue as a result of the ongoing uncertainty about future British economic and trade relations with the European Union. The news surrounding the Brexit talks is not good, it is difficult to see what the domestic political consensus is and, as a result, there is more evidence of businesses considering other locations (especially in financial services). The UK economy has held up well so far, but investor sentiment towards the country could get worse. As Mark Carney suggested, the Bank of England is not indifferent to the effects of a weaker exchange rate. So, crazy as it seems, the risk of a Bank of England hike in the months ahead is a genuine one. Gilts at a 1% yield do not look very safe.

•          How much? – Central bankers must wish that QE had the same effect on prices as global football television deals. Throw more money at a limited supply of goods and the price will go up very rapidly. The transfer window that has just closed has been a very clear example of that and it could have been worse if certain well discussed deals had gone through. As Roy Keane suggested this week, in today’s money, players like Beckham and Giggs would have been worth billions. Still, I can’t get too worked up about “value” in football transfer fees. They have been rising since I was a kind and I doubt they will go back down anytime soon. Fans don’t care (although chants of “what a waste of money” are not uncommonly directed at players from opposing teams). What fans care about is winning games and trophies and spending money to give the club a better chance of success is what matters. So, net beneficiaries from the summer’s transfer dealings are the two Manchester teams, Liverpool and Chelsea. Tottenham fans will argue that they didn’t need to strengthen the squad (although Llorente looks like a good purchase) and the less said about Arsenal the better. Given the “near” deals there could be quite a lot of movement in January. One thing is for sure, there is no shortage of money and the velocity with which it circulates through the soccer system is not likely to diminish.

[Volver]