Measure for measure: Putting the emerging market debt sell-off in context

Emerging market debt (EMD) has had challenging year-to-date performance, and investors are questioning whether this is merely a performance correction after a strong two-year spell, or the start of something bigger. There are some similarities between the current sell-off and 2013’s ‘taper tantrum’, with both influenced to an extent by Federal Reserve (Fed) policy normalisation. If this serves as a useful point of reference, much of the sell-off has already likely materialised. Chief among investor concerns are two key global macro risks with uncertain outcomes – policy normalisation and trade protectionism. This backdrop of global macro uncertainty has intensified the focus on emerging market (EM) vulnerabilities. However, technicals rather than fundamentals have exacerbated this sell-off, with a big unwind of cross-over investor positioning. Relative to 2013, we believe EMs are in a fundamentally stronger position in aggregate. The dislocation created as a result of the indiscriminate selling may also create new investment opportunities for investors able to adopt a flexible approach.

Colm McDonagh – head of Emerging Market Fixed Income. Insight Investment, a BNY Mellon company

Emerging market debt (EMD) has had challenging year-to-date performance, and investors are questioning whether this is merely a performance correction after a strong two-year spell, or the start of something bigger. There are some similarities between the current sell-off and 2013’s ‘taper tantrum’, with both influenced to an extent by Federal Reserve (Fed) policy normalisation. If this serves as a … read more

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All hail our algorithmic overlords?

Artificial intelligence (AI) is frequently touted as having the potential to revolutionise every aspect of our daily lives from work to leisure time; commuting to healthcare. Less optimistically, though, luminaries such as Elon Musk among many others have drawn attention to the possible dangers of AI: that by creating the singularity we risk ‘summoning a demon’ that ultimately consigns humanity to oblivion.

We take a more optimistic view, noting that while emerging technologies have often given rise to scare stories about their impact on people’s health and behaviour their benefits have usually outweighed the drawbacks.

For now – and even though it’s still in its infancy – we can highlight how effective AI has been in the fields of healthcare diagnostics, medicine prescriptions, and air travel. For the future, we believe AI is likely to give companies a second wind when it comes to productivity, allowing them to be more efficient, better, faster and actually quite creative in how they transform their offerings.

This in turn should improve growth and therefore, hopefully, generate new kinds of jobs. Far from creating a techno-apocalypse I think AI has the power to transform the world for the better and not for the worse.

April LaRusse – Fixed Income product specialist. Insight Investment, a BNY Mellon company

Artificial intelligence (AI) is frequently touted as having the potential to revolutionise every aspect of our daily lives from work to leisure time; commuting to healthcare. Less optimistically, though, luminaries such as Elon Musk among many others have drawn attention to the possible dangers of AI: that by creating the singularity we risk ‘summoning a demon’ that ultimately consigns humanity … read more

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Emerging markets play leapfrog, but how?

The smartphone has broken down market barriers and created rapid change in various industries. For emerging market economies, the technology has given consumers a powerful tool, allowing emerging market companies to surpass their developed counterparts in some sectors as they leapfrog traditional business models. In China, mobile applications such as Alipay and WeChat have created platforms that are deeply integrated into people’s lives and, as a result, mobile payments are soaring. In Africa McKinsey forecast that 450 million people will be using mobile banking within the next five years, meaning there is little need for physical branch infrastructure. For remittance flows, mobile applications allow the easy transfer of money, creating significant capital flows from the developed to emerging world as workers send money home. This is an evolution which has only just begun and which will increasingly blur the lines between the developed and emerging world, forcing investors to change how they think about the opportunity set available in the latter.

Colm McDonagh – head of Emerging Market Fixed Income. Insight Investment, a BNY Mellon company

The smartphone has broken down market barriers and created rapid change in various industries. For emerging market economies, the technology has given consumers a powerful tool, allowing emerging market companies to surpass their developed counterparts in some sectors as they leapfrog traditional business models. In China, mobile applications such as Alipay and WeChat have created platforms that are deeply integrated … read more

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Dispelling the myth: Volatility can be positive for returns

In 2017, the global economy transitioned from a period of sluggish, US-dominated growth, to a more synchronised global recovery. With inflation still well behaved, corporate earnings grew strongly, buoying both equity and credit markets and suppressing volatility, which reached historically low levels.  So far, 2018 has proved more challenging for some investors. Volatility spiked in the first quarter, driven by the unwinding of US volatility products and then compounded by an increase in global trade tensions and profit taking in US technology stocks. Unanticipated volatility spikes generally hurt in the near term, but they can also offer opportunities. Although generally short lived, the fear of loss among investors drives risk appetite downwards, and derivatives markets become dominated by those looking to hedge against downside risk. As a result, risk premia in option pricing can become elevated and this can create greater opportunity for alternative, option-based strategies to deliver positive returns.

Steve Waddington – portfolio manager. Insight Investment, a BNY Mellon company

 

In 2017, the global economy transitioned from a period of sluggish, US-dominated growth, to a more synchronised global recovery. With inflation still well behaved, corporate earnings grew strongly, buoying both equity and credit markets and suppressing volatility, which reached historically low levels.  So far, 2018 has proved more challenging for some investors. Volatility spiked in the first quarter, driven by … read more

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CPI, RPI and the true cost of clothing

Have UK clothes prices gone up or down over the last 10 years? Most people would assume that the answer to this would be simple, just look at inflation. But not all inflation calculations are the same, they can use different formulas to calculate price changes and, as a result come to different conclusions.

Most people know that the UK’s Retail Price Index (RPI) differs from the Consumer Price Index (CPI), as RPI includes housing costs in the form of council tax and mortgage interest payments, but the differences between the two indices are deeper than this. For example when you compare clothing and footwear prices over the last twenty years, both CPI and RPI show prices declining during the first ten years, but for the second ten years a clear divergence appears.

The reason for this disparity comes down to calculation method. RPI uses the ‘Carli’ formula for around 30% of the prices it measures (including clothing and footwear), a measure that has previously been criticised for introducing an upward bias to inflation data. But even the initial decline is questionable! The Bank of England (BoE) have stated that annual CPI inflation may have been underestimated by up to 0.3% a year between 1997 and 2009 as a result of seasonal sales for clothing and footwear which saw discounts being captured by the data, but not the recovery back to normal prices as the sales ended. This led to a change in methodology being introduced at the start of 2010.

With inflation at the top of the BoE’s tolerance threshold, the Monetary Policy Committee will need to make a judgement on how quickly they need to raise interest rates. Understanding these intricacies of inflation measurement is a critical part of their role.

David Hooker – portfolio manager. Insight Investment, a BNY Mellon company

Have UK clothes prices gone up or down over the last 10 years? Most people would assume that the answer to this would be simple, just look at inflation. But not all inflation calculations are the same, they can use different formulas to calculate price changes and, as a result come to different conclusions. Most people know that the UK’s … read more

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Three labour trends keeping a constructive backdrop for markets

In the normal course of events, synchronised growth in activity at the rate we have been seeing across the globe would be accompanied by a clear increase in inflationary pressure that would, as a result, require an increase in interest rates significant enough to hold back risk-asset performance.

That clearly isn’t happening yet. Indeed, the latest inflation levels recorded in key developed economies and the BRICs (Brazil, Russia, India and China) are either not at central bank target rates/ranges, or are not a significant threat to them.

Trends in labour markets around the globe have led to more female, older, self-employed and part-time workers being drawn into labour markets, which in turn has resulted in wage growth that has been far more muted than expected.

At this point in time, we see no reason why more women, for example, cannot be drawn into, say, the US labour market. We can also see no reason why part-time self-employment shouldn’t continue to grow as a percent of total employment.

The big question then, is whether or not these constructive conditions of good growth with limited inflationary pressure can persist…

Steve Waddington – fund manager. Insight Investment, a BNY Mellon company

In the normal course of events, synchronised growth in activity at the rate we have been seeing across the globe would be accompanied by a clear increase in inflationary pressure that would, as a result, require an increase in interest rates significant enough to hold back risk-asset performance. That clearly isn’t happening yet. Indeed, the latest inflation levels recorded in … read more

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High yield in 2018: Will we see more rising stars than fallen angels?

When global growth strengthens credit dynamics generally improve, especially for those most sensitive to the economic cycle. For high yield investors this creates an important investment theme as established companies get upgraded, causing the spreads of their debt relative to government bonds to tighten, presenting new opportunities.

In 2015 and 2016, companies in the oil and gas, and mining, sectors were affected particularly badly, but this turned around as commodity prices stabilised and then started to rise. Companies that controlled costs and paid down debt have since benefited. If the momentum in the global economy continues into 2018, then this powerful technical dynamic within the high yield market should continue.

Uli Gerhard – portfolio manager. Insight Investment, a BNY Mellon company

When global growth strengthens credit dynamics generally improve, especially for those most sensitive to the economic cycle. For high yield investors this creates an important investment theme as established companies get upgraded, causing the spreads of their debt relative to government bonds to tighten, presenting new opportunities. In 2015 and 2016, companies in the oil and gas, and mining, sectors … read more

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In emerging markets, managing foreign exchange risk is critical

One major change in recent years is how policy makers in many emerging markets have become comfortable with using currency as a buffer to insulate their economies from negative shocks. Among the first lines of defence against any political, economic or external shock is to allow currency weakness, with authorities only stepping in to counter falls once they become significant enough for inflation pass-through to become a concern. As such, management of currency risk in order to control volatility and avoid potential losses has become even more important.

Colm McDonagh – head of EM fixed income. Insight investment, a BNY Mellon company

One major change in recent years is how policy makers in many emerging markets have become comfortable with using currency as a buffer to insulate their economies from negative shocks. Among the first lines of defence against any political, economic or external shock is to allow currency weakness, with authorities only stepping in to counter falls once they become significant … read more

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How Argentina came in from the cold

Upon assuming office in 2015, President Mauricio Macri and his economic team immediately set about reforming Argentina’s economy – dismantling capital controls, allowing the currency to float freely and settling a long-standing dispute with creditors. Argentina now reaps the benefits of these reforms with growth and confidence returning once more.

These reforms have also led to positive developments for Argentina’s debt markets, a fact that was perhaps most clearly observed last year when Argentina announced its return to the international bond market with a record-breaking US$16.5 billion dollar-denominated issuance.

Less observed, however, has been the development of, and increased demand for, Argentinian peso-denominated paper as the government’s efforts to rebuild the local currency bond curve start to bear fruit.

We think investors will remain willing consumers of these bonds as long as they can continue to hedge the currency exposure with no impediments to capital repatriation. While for Argentinian corporates, the ability to issue in domestic currency eliminates liability currency mismatches.

Argentina’s debt markets have undergone a remarkable transformation against a backdrop of profound economic and political change. The confluence of development of sovereign, local currency, corporate and foreign exchange markets provides a unique opportunity for investors to gain exposure to this improving story and access what we think constitute some of the most attractive and compelling yields around.

Oliver Williams – Insight, a BNY Mellon company

Upon assuming office in 2015, President Mauricio Macri and his economic team immediately set about reforming Argentina’s economy – dismantling capital controls, allowing the currency to float freely and settling a long-standing dispute with creditors. Argentina now reaps the benefits of these reforms with growth and confidence returning once more. These reforms have also led to positive developments for Argentina’s … read more

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The remittances spike and its impact on global capital

Remittance flows have become an increasingly important element of global capital flows. As labour markets have become more globalised, workers move from developing countries in order to obtain higher salaries in the developed world. Often these workers continue to support family members in their country of origin and regularly send a portion of their salary to them. In countries such as Mexico and India, governments have worked with the banking industry to lower transaction costs and make the process more efficient. As labour markets in developed countries tighten, so the upward trend should resume. One danger is that the size of these flows is now drawing political attention in some developed countries and could become a discussion target for trade negotiations if imbalances become too high. That said, we don’t believe we are quite at that stage yet.

Colm McDonagh – Insight, a BNY Mellon company

Remittance flows have become an increasingly important element of global capital flows. As labour markets have become more globalised, workers move from developing countries in order to obtain higher salaries in the developed world. Often these workers continue to support family members in their country of origin and regularly send a portion of their salary to them. In countries such … read more

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