Fixed Income 2020 - A Brave Old World?
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A BOUTIQUE OF VONTOBEL
ASSET MANAGEMENT
Fixed Income 2020 – A Brave Old World?A Soft Landing for Global Economies?
Growth Policy Risk Recovery Inflation Rates
Bottoming out Q1, Monetary policy Trade war European upturn Inflation remains 2020: a year of
modest pickup back to an remains an beginning but fiscal as elusive central bank
later in 2020. expansion bias. unpredictable risk. stimulus needed. as ever. pausing.
These views represent the opinions of TwentyFour as at 31st December, 2019, they may change and may have already been acted upon, and do not constitute investment advice or a personal recommendation.
Source: TwentyFour
2How Close Are We to the End of the Credit Cycle?
US Europe UK
Macro economic indicators Macro economic indicators Macro economic indicators
Consumer leveraging Consumer leveraging Consumer leveraging
Corporate leveraging Corporate leveraging Corporate leveraging
Credit metrics Credit metrics Credit metrics
Credit spread widening Credit spread widening Credit spread widening
Tightening of financial conditions Tightening of financial conditions Tightening of financial conditions
Surprise or Shock to the system Surprise or Shock to the system Surprise or Shock to the system
Each factor is colour coded as supportive (green), neutral (orange) or negative (red) for current credit markets. These views represent the opinions of TwentyFour as at 31st December 2019, they may change and may have already been acted upon, and do not
constitute investment advice or a personal recommendation. Factors are not considered in isolation when forming these opinions. Source: TwentyFour.
3US Economy and The Fed
• US GDP to stabilise at around 2% for 2020, driven by a modest increase in
business investment and a healthy consumer.
• Most significant risk to this forecast is a re-escalation of US/China trade war.
• Fed is very much on hold mode with a wait-and-see approach.
• Base case is no change throughout 2020, with a risk to further easing rather
than a return to tightening.
• Our year-end UST 10-year forecast is 1.70%, driven by stable growth, a lack of
inflation, late-cycle demand and a positive yield curve.
These views represent the opinions of TwentyFour as at 31st December, 2019, they may change and may have already been acted upon, and do not constitute investment advice or a personal recommendation.
Source: TwentyFour
4Europe and the ECB
• Eurozone GDP unlikely to be much above 1% in 2020.
• Some early signs of a recovery in the manufacturing surveys, but no V-shaped
recovery in sight.
• Fiscal stimulus is desperately needed but the bar remains high to facilitate.
• We think the ECB will cut one last time to -0.6% and QE will double to €40bn.
• Year-end forecast for Bunds is expected to be -40bp (breakeven on the year).
• Eurozone complex of government bonds has re-correlated which should
facilitate further convergence of spreads - Spain is our favourite play.
Past performance is not a reliable indicator of future performance. These views represent the opinions of TwentyFour as at 31 December 2019, they may change and may have already been acted upon, and do not constitute investment advice or a personal
recommendation. Source: TwentyFour
5UK and the MPC
• UK GDP to begin gradual pick up after 3 years of uncertainty with Brexit over.
• Our 2020 projection is prone to volatility but we estimate 1.5% GDP growth.
• Driven primarily by entrepreneurial re-awakening and return of business capex.
• We think rates will just about remain on hold as Bank of England waits to see
evidence of the pick up in investment.
• Our 10-year Gilt forecast takes yields to 1% by year end as we see the curve
being too flat, therefore lagging the returns of both Bunds and Treasuries.
These views represent the opinions of TwentyFour as at 31 December 2019, they may change and may have already been acted upon, and do not constitute investment advice or a personal recommendation. Source: TwentyFour
6Global Credit Markets
• We start 2020 with low outright yields and reasonably tight credit spreads
across the world of hard-currency fixed income.
• Our base case takes generic credit spreads modestly wider in 2020 — driven by
lower-than-average growth, tight spreads, an ageing cycle, weakening credit
metrics and a pick up in the global default rate.
• However, yields will be underpinned by highly supportive central banks, the
continued demise of cash as an asset class, very high DSCRs, a healthy
consumer and a highly capitalized banking system.
• The principal risk to this forecast is again geopolitical factors such as a re-
escalation of the US–China trade war.
These views represent the opinions of TwentyFour as at 31st December, 2019, they may change and may have already been acted upon, and do not constitute investment advice or a personal recommendation.
Source: TwentyFour
7Lower Returns on Offer
2018 2019 2020
Sector Yield Spread Yield Spread Yield Spread
US HY 5.8% 373 8.0% 537 5.4% 365
EUR HY 2.5% 277 4.7% 502 2.7% 320
UK HY 4.6% 388 7.3% 635 5.1% 452
US IG 3.3% 97 4.3% 158 2.9% 99
EUR IG 0.8% 85 1.3% 151 0.5% 93
UK IG 2.4% 119 3.1% 180 2.1% 126
COCO 4.3% 302 6.4% 469 3.9% 291
EUR SUB-INS 1.8% 166 3.1% 312 1.3% 174
EM 4.4% 220 6.0% 330 4.5% 266
A disciplined approach to risk management is essential
Source: ICE Indices. 27 December, 2019
8How to Position for 2020
Positioning Overview
Likes Dislikes
• Brexit spread premium • Credit spreads vulnerable late cycle
• Shorter duration in Credit BB and above • CCC and Single B borrowers
• Longer duration in rates (US Treasuries) • Extension risk in corporates
• Spanish Govts • Unsecured credit
• Call risk in Insurance and Banking • Sin industries
• Secured securities • Technology
• ABS (CLO in particular) • Automotive
• Selected hard currency EM Corporates • Retail
These views represent the opinions of TwentyFour as at 31 December 2019, they may change and may have already been acted upon, and do not constitute investment advice or a personal recommendation. Source: TwentyFour.
10Brexit Premium Still Exists
A significant In December We continue to The current With the £ more In keeping
Brexit premium 2019, many look to extract premium will be stable, we exposures
exists in £ investors this premium realisable over believe relatively short
assets, booked the safely in time, through international and any future
including fixed political targeted £ higher yields investors will trade-deal-
income, since premium to bonds, after when the return, linked volatility
the UK’s exit capital gain. hedging out the bonds mature. narrowing the low, we’re
referendum. currency risk. premium confident of
spread. extracting this
premium.
These views represent the opinions of TwentyFour as at 31st December, 2019, they may change and may have already been acted upon, and do not constitute investment advice or a personal recommendation.
Source: TwentyFour
11We Still Like Subordinated Financials
Fully phased-in initial Basel II CET1, Tier 1 and total capital ratios by region
20%
CET1 Tier 1 Total
15%
Europe
10%
Americas
Rest of the World
2012 2015 2018 2012 2015 2018 2012 2015 2018 5%
Capital is at record levels with very low risk appetite, unlimited liquidity and very strong regulatory scrutiny.
We prefer well-rated financial subordinated debt with spread premiums over similarly rated senior debt of smaller corporates.
Call risk in particular can be very well rewarded.
Source: BIS, consistent sample of Group 1 banks Graph 16 October 2019.
12Value in BB European CLOs
EUR CLO Spreads – EUR HY Spreads
BPS `
500
400
BB CLO – BB HY
300
200 Jan ’14 Jan ’15 Jan ’16 Jan ’17 Jan ’18 Jan ’19
Source: TwentyFour, Bloomberg. October 2019.
13EM BB Hard Currency Relative Value
HY Spreads
BPS `
700
500
US HY BB
EUR HY BB
EM BB 300
100 Dec ’13 Feb ’15 Apr ’16 Jun ’17 Aug ’18 Oct ’19
Source: Bloomberg October 2019.
14Volatility and Risk Management will be Critical
• Fixed income investors in 2020 are unlikely to Managing volatility will be the key to
earn the types of returns seen in 2019. maintaining positive fixed income returns
• Lower yields will mean lower tolerance for risk. and protecting client capital in 2020.
• Market turmoil of Q4 2018 was a good guide • Blending in material risk-off positions.
of what to expect when the cycle finally does
come to an end. • Yield adds a degree of protection, but stay
• A disciplined approach to risk management short dated to avoid volatility.
will also be critical. • Be more liquid than at any previous point
in this cycle.
These views represent the opinions of TwentyFour as at 31st December, 2019, they may change and may have already been acted upon, and do not constitute investment advice or a personal recommendation.
Source: TwentyFour
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