Monday morning sees our Fixed Income team sit down and thrash what’s what for markets. We assess how our positioning has fared and should it change.
In the debate this morning one of the managers quipped “If you are going to invest in a country with a crazy dictator, you may as well get paid for it” – while discussing the relative value between the US and emerging markets.
This blog doesn’t aim to proffer views on US politics; however, there is no doubt that the Trump era is very different from the Obama regime. So I wondered how EM had faired since the start of 2017.
For the US Treasury market, yields have rallied by just over 10bps using the US 10 year note as a gauge. Overall returns would have earned you a further 2 months of its 2.25% coupon. All in all you’d be up around 1.5%. So my colleague was right – a generic investment grade Emerging Market index has done double that so far this year – just over 3%.
“You are mixing your metaphors” I hear you say – mixing your Sombreros with your Stetsons. It is an observation but it is clear that what happens in the US materially effects EM. Immediately after Donald Trump’s election, markets for all the obvious political reasons, became very bearish on EM. However, as the dust has settled there is a realisation that things aren’t changing overnight and that the Federal Reserve isn’t raising rates as aggressively as some had expected. Clearly there is more to relative value between the US and EM, but so far this year looks likely to repeat some of the key themes for 2016: any softness in the US interest rate cycle is likely to be good for EM economies.