Market Views

GLOBAL CREDIT BULLETS | Monday, 17th May 2021

Covid-19 – Cases on the rise in Asia.
While India remains the global Covid epicentre, more Asian countries are also struggling with rising virus cases again. Japan is seeing daily cases surging back to its previous peak, prompting the government to add more prefectures to a state of emergency. The Singapore government tightened restrictions on Friday amid rising community cases, with the long-awaited Singapore-Hong Kong travel bubble likely to be delayed again. Taiwan, which has been largely Covid-free through the pandemic, reported triple-digit cases for three consecutive days. Ironically, many Asian countries’ earlier successes in containing the virus with aggressive public health measures have unintendedly led to slower vaccination progress due to less urgency: most countries have only vaccinated less than 10% of their populations. In addition, reports of fully vaccinated people getting infected with the Indian strain are raising concerns about vaccine efficacy against potential new mutants, although there is still no substantial evidence to prove this. Slow vaccination progress, rising cases and more cautious government approaches in Asia mean the region could see a setback to its reopening and a further delay of international travel.

US Economy – Supply bottlenecks pushing inflation.
The US’s annual inflation rate rose to 4.2% last week, higher than the 3.6% expected from economists. However, many components of the CPI figure can be considered one-offs or temporary. Used cars and trucks prices rose 20% year over year, 10% in April alone, pushing the aggregate number higher. This was largely driven by supply shortages of microchips and increased consumer demand. The Biden administration and the Fed continue to argue that inflation rises are transitory do not warrant policy action as of yet. What if they are wrong? PPIs have overshot 4% in the US, the EU, China and Japan and may stay high for some time due to: 1) supply side disruptions which may last until 2022 2) increased commodity and material prices if we continue to see more fiscal spending and 3) onshoring supply chains and production, both as a lesson learned from COVID, and as a way to protect intellectual property in an environment of rising geopolitical risk. We have already started seeing evidence of producers passing on higher production costs to the consumers, posing a risk of persistently higher-than-target inflation.

Global Credit Opportunities Fund – Positioning for a more volatile 2H21.
We expect volatility to rise over the coming months, potentially triggered by near-peak economic momentum, already-long positioning in credit and gradually less dovish central banks, as we discuss in our latest Silver Bullet | Dog Money and Podcast. We would use this opportunity to redeploy capital in beta-markets, including high yield debt and emerging market hard currency. We continue to be strongly invested in securities linked to real assets or real cash-flows, like convertible bonds and commodity sectors, while we maintain a neutral duration and a very selective allocation to credit. Credit remains the sleeping giant in this environment and offers limited opportunities, as spreads are at record tights and positioning is long. Hence, we remain 50% invested and maintain a good degree of credit protection. Overall, we maintain high liquidity, low duration, low credit exposure and high convertible debt exposure. Since May, the GCO fund has been awarded a five-star rating by Morningstar, under the Global Flexible Bonds category.

To read more on our latest views, please see our Silver Bullet | Dog Money or visit our Insights section.

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