Where global money places bets as flood stimulation markets

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(Bloomberg) – More than $ 8 trillion was thrown away during the Covid-19 crisis by governments around the world and hundreds of billions more by central banks from Washington to Wellington. And that means that investors find a multitude of opportunities, from quality bonds to emerging market stocks.


Sign on the Wall Street sign as seen on various buildings, address of Wall St, downtown Manhattan is a neighborhood of roads and areas important to the United States, the global economy, the banking system, markets, etc. with the headquarters of companies and financial institutions located such as the New York Stock Exchange NYSE. New York, United States (Photo by Nicolas Economou / NurPhoto via Getty Images)


© Nicolas Economou / NurPhoto via Getty Images
Sign on the Wall Street sign as seen on various buildings, address of Wall St, downtown Manhattan is a neighborhood of roads and areas important to the United States, the global economy, the banking system, markets, etc. with the head offices of companies and financial institutions located like the New York Stock Exchange NYSE. New York, United States (Photo by Nicolas Economou / NurPhoto via Getty Images)


According to the portfolio managers of Western Asset Management Co. and JPMorgan Asset Management, looking for where the central banks themselves are buying, even if it has been well flagged, still has merits. Sectors of China’s large bond market, including corporate debt in the trash, have yet to take advantage and have room to catch up with their higher-rated peers as authorities continue to boost incentives, said M&G Investments.

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Here is an overview of some key areas and topics for fund managers, with authorities taking more steps to contain the impact of the pandemic.

Credit

Patrik Schowitz of JPMorgan Asset Management says that high quality credit is well supported by central banks and offers a good way to add risky assets to portfolios.

“If you think about high yield, where there is still a lot of pain ahead, or about emerging market debt where there are still a lot of currency and balance of payments problems ahead,” these are areas less attractive, Schowitz, global multi-asset strategist at asset manager, said on Bloomberg TV. “We would stay away from the riskiest end, but the safest end of investment grade credit actually looks like a very good swap here. “


The return of unwanted debt in the United States remains underwater, while the investment category rebounds


© Bloomberg
The return of unwanted debt in the United States remains underwater, while the investment category rebounds


However, some see opportunities in the lowest rated segments of the market. The region needs to manage the growing risk of default, as borrowers are facing the worst recession since the Great Depression. But again, it comes down to central bank support, after the Federal Reserve announced in April that it would start buying some of the recently downgraded debt.

This sparked a bonanza of high-yield debt securities, with more than $ 37 billion sold in the unwanted US bond market in April, its busiest month in three years.

The Fed’s corporate buying program also provides confidence and underlying support for Asian BBB credits, as well as for some BBs and the so-called fallen angels, said Desmond Soon, manager investment management for Asia excluding Japan at Western Asset Management.

“We think it is useful to” follow “the Fed,” he said.

China Junk Bonds

The continued weakness in Chinese growth has revived a push for more action from Beijing. The advantage for investors is that, compared to the United States, China is much more advanced in reopening its economy.

Pierre Chartres, chief investment officer at M&G Investments in Singapore, said that the outperformance of high-quality bonds has recently meant that there is less upside potential. He considers high yield debt to be more attractive.

“Where we have added some exposure is in the high-yield market in China,” he said on Bloomberg TV. “It is of course much riskier, especially for some real estate developers, but some of them have access to onshore financing. Virus data has been encouraging in China recently. “

Unloved Emerging Markets

The valuation gap between stocks in developing countries and their mature market counterparts is at its highest since 2008, showing investor disgust for the asset class. Andrew McCaffery, global investment director at Fidelity International, said he remains cautious in emerging markets in both equity and debt.

“These markets tend to have less capacity to engage in stimulus, keep rates low and prevent capital flight,” he said.


a screenshot of a mobile phone: the biggest discount since 2008 still cannot attract investors to EM stocks


© Bloomberg
Deepest discount since 2008 still can’t attract investors to emerging market stocks


These extreme valuations offer some appeal, particularly in China, where new targeted demand-side programs are planned as well as further interest rate cuts.

“The political decisions made by China have generally been very effective and they can crucially force a revival of the economy, which Western economies cannot,” said Sébastien Galy, senior macro strategist at Nordea Asset Management. “China will most likely lose more manufactured goods to Asia and Mexico, but its service sector is expected to continue to grow and this is something the government is very keen on as it steadily climbs the chain of added value. “

Inflation risk

The stimulation of government and monetary authorities during the crisis led to less independence from central banks. If this trend continues, inflation could rise, an underestimated risk in the markets, according to Colin Harte, multi-asset portfolio manager at BNP Paribas Asset Management.

If the world comes back to a situation “where money is printed and spent quickly by the government instead of being inactive on the bank balance sheet,” he said, “it will drive up inflation.”

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© 2020 Bloomberg L.P.

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