Looking where central banks themselves are buying, even if it’s been well flagged, still has merits, according to portfolio managers at Western Asset Management Co. and JPMorgan Asset Management.
More than $8 trillion has been thrown at the Covid-19 crisis by governments around the globe and hundreds of billions more by central banks from Washington to Wellington. And that means investors are finding a swath of opportunities from investment-grade bonds to emerging-market equities. Looking where central banks themselves are buying, even if it’s been well flagged, still has merits, according to portfolio managers at Western Asset Management Co. and JPMorgan Asset Management. Areas of China’s vast bond market, including junk-rated company debt, are yet to benefit and have room to catch up with more highly-rated peers as authorities keep pumping in stimulus, says M&G Investments. Here’s a look at some key areas and topics for money managers as authorities take more steps to tame the pandemic’s impact.
JPMorgan Asset Management’s Patrik Schowitz says investment-grade credit is well supported by central banks and offers a good way to add risk assets to portfolios.
“If you think about high-yield, where there’s a lot of pain still to come, or emerging-market debt where there is still a lot of currency and potential balance of payments problems to come,” those are less appealing areas, Schowitz, global multi-asset strategist at the asset manager, said on Bloomberg TV. “We would stay away from the riskier end, but the safer end of investment-grade credit actually looks like a pretty good trade here.”
Still, some do see opportunities in lower-rated sections of the market. The area requires navigating rising default risks, as borrowers struggle with the worst recession since the Great Depression. But again, it comes down to central bank support, after the Federal Reserve said in April that it would start buying some debt recently downgraded to junk.
That sparked a bonanza of high-yield debt issuance, with more than $37 billion sold in the U.S. junk bond market in April, its busiest month in three years. The Fed’s corporate buying program is also providing confidence and underlying support for Asian credits in the BBB category, as well as some BBs and so-called fallen angels, said Desmond Soon, head of investment management for Asia ex-Japan at Western Asset Management.
“We think that there is value in ‘shadowing’ the Fed,” he said.
China Junk Bonds
Continued weakness in Chinese growth has renewed a push for more action from Beijing. For investors, there’s the advantage that, relative to the U.S., China is much further ahead in reopening its economy. Pierre Chartres, investment director at M&G Investments in Singapore, says the outperformance of high-grade bonds recently means there’s less potential upside. He sees some high-yield debt as more attractive.
“Where we have been adding some exposure is in the high-yield market in China,” he said on Bloomberg TV. “It’s of course a lot more risky, especially some of the real estate developers, but some of those do have access to onshore funding. The data from the virus has been encouraging in China recently.”
Unloved Emerging Markets
The valuation gap between developing-nation equities and their mature-market peers is at the widest since 2008, showing investor distaste for the asset class. Andrew McCaffery, global chief investment officer at Fidelity International, said he remains cautious on emerging markets across both equity and debt.
“These markets generally have less capacity to embark on stimulus, keep rates low and avoid capital flight,” he said.
Those extreme valuations do offer some appeal, especially in China, where further targeted programs to support demand are forecast along with more reductions in interest rates.
“Policy decisions taken by China have been generally very efficient and they can crucially force a jump-start of the economy, something Western economies cannot,” said Sebastien Galy, senior macro strategist at Nordea Asset Management. “China will very likely lose more manufacturing to Asia and Mexico, but its service sector should continue to develop and it is something the government is quite keen on as it steadily moves up the added value chain.”
Stimulus from both government and monetary authorities during the crisis has led to less independence at central banks. If that trend runs further, inflation could ramp up, a risk underappreciated in markets, according to Colin Harte, multi-asset portfolio manager at BNP Paribas Asset Management. If the world goes back to a situation “where money is printed and spent quickly by the government instead of lying dormant on banks’ balance sheet,” he said, “this will raise inflation.”