Matthew Merritt
China the outlier in U.S. trade war negotiations
“Although the US economy is expanding at a firm rate, global trade has been a significant concern for investors particularly as growth outside the US has already decelerated since then beginning of the year.
The US has been able to strike new trade deals with some of the countries it appeared to have fallen out with, or agreed to further talks without the imposition of tariffs in the meantime. Canada and Mexico are the obvious examples, but the EU and Japan also fall into this category.
But the approach to China is clearly somewhat different – an apparent attempt at isolation, with large negative measures already implemented and the threat of more should China not give significant ground in short-order.
The outcome will clearly depend on just how painful the slowdown in trade volumes becomes (for both sides) and the US mid-term election result may have some bearing on this”, says Matthew Merritt, Head of Multi-Asset Strategy Team.
Global Investment Grade Credit
Peter Bentley, Deputy Head of Fixed Income and Head of Global Credit notes : “Fundamentally, credit markets continue to be in good shape, but as the credit cycle continues to mature and M&A activity continues to be popular, caution is warranted.
Although we believe valuations are somewhat stretched, we do not see catalysts for material weakness on the near-term horizon. Therefore a close-to-neutral position seems appropriate (rather than a costly outright short), and a focus on targeting relative value between different sectors, industries and issuers within the global credit universe could be the most appropriate strategy.
In a potentially range-bound environment, we believe stock selection will be key to outperformance. Investors may also benefit from opportunities to implement relative-value trades between cash bonds and credit default swaps, or CDS – the so-called ‘basis trade’.
Given bouts of volatility, CDS could be deemed more likely to track price moves in equity markets to a greater extent than cash credit, potentially creating temporary divergences in pricing.”
Emerging markets debt
Colm McDonagh, Head of Emerging Market Fixed Income writes “The year-to-date weakness across emerging market debt has led to an improved valuation proposition.
The sell-off has, at times, been indiscriminate, meaning that pockets within the emerging-market complex have weakened without underlying fundamental justification. Investor positioning is also lighter, with both ‘crossover’ and dedicated investor positioning underweight.
China has the means to continue serving as the anchor for wider emerging markets – while Chinese growth has been slowing, the authorities have responded with domestic policy easing and by maintaining relative currency stability.
If this succeeds in stabilising domestic demand, we could see similar stability in terms of fixed asset investment, which in turn would lead to improving commodities demand. Argentina, Turkey and Brazil have made some headway of dealing with their frailties, as have other emerging markets, and we believe this too should contribute to greater stability for the asset class.”