Emerging markets: In need of a new definition Emerging markets: In need of a new definition

In writing these blogs one hopes to be insightful, consistent, and timely, ie to try to emulate the output of Howard Marks at Oaktree.

His memo of January this year on equities inspired us to look further into the relative attractiveness of bonds vs equities (here).

Howard has updated his thoughts in August (link) –  this looks like something that is seriously on his mind.

The United States is on the brink of an industrial transformation that could redefine its economic trajectory. Inward investment is surging, driven by a wave of new manufacturing plants, onshoring and reshoring initiatives, and a parallel boom in data centre and power generation construction. This is not incremental change; it is a structural shift that will demand vast amounts of labour, raw materials, and productive capacity.

Compared to a year ago, the US Treasury curve has steepened considerably. While yields at the front end have dropped due to anticipated rate cuts, the long end of the curve has not budged. In fact, long-end bonds have sold off, giving bond investors the opportunity to lock in elevated yields. That’s quite a tempting thought, considering we’re talking about the US, which sets the global reference rate for many asset classes. In economies where GDP growth is constrained by high levels of debt and…

Government debt levels continue to linger in uncomfortable territory across developed markets, with fiscal deficits stubbornly high despite reasonably resilient growth and employment – especially when compared to past norms. This is not a post-crisis or post-war moment, yet debt levels resemble those of an economy fighting its way out of recession.

On 5th November China issued $4 billion worth of US dollar (USD)-denominated bonds split across two equal tranches. The orderbook was $161 billion at one point, but ended near $118 billion when final pricing was announced. The 3-year $2 billion tranche priced at US Treasury + 0bp (aka flat to UST) and the 5-year $2 billion tranche priced at US Treasury +2bp. The following morning, bonds traded up significantly and were quoted more than 30bp inside UST (specifically: China 28s -33.5bp  | China 30s -37.5bp).

‘Why would I buy investment grade credit now, spreads are so tight’ is the cry that I hear. It’s true, IG spreads have been tight for some time now, but with all in yields looking attractive fixed income shouldn’t be overlooked. I make the case that now is the time to be looking at investment grade credit in spite of tight spreads…

Recessions often appear crystal clear when analysed in retrospect. It’s easy to sit back, glance at the Bloomberg screen, and spot the evident recession we had in 2008 or the dot-com bubble of 2000.

However, discerning whether an economy is on the brink of a recession, or even if it is already are in one, is considerably more challenging. Recessions often become obvious only once they are well underway, and by then, significant economic damage may have occurred.