Maintaining an optimistic stance on risk assets

Mark Dowding, partner & co-head of Investment Grade at BlueBay Asset Management gives his latest view on the markets. 

Post-Fed price action last week was dominated by fears that downside risks to the global economy are growing, leading to a renewed rout in emerging markets and risk assets in general.

The Chinese Caixin PMI, at 47.0, did little to lift these fears in a week where there were few other significant data releases of note, though Yellen’s testimony last week restored some calm as she reiterated that the economic outlook remains robust and that the Fed continues to expect to start hiking rates before the end of the year.

In hindsight, the FOMC may have done a lot better by opting for the ‘dovish hike’, though in reviewing price action in markets in the past several days it seems much of what we have witnessed is investors expressing a degree of fear and uncertainty, rather than reacting to new information.

Consequently we continue to look for markets to regain their poise and for the environment to turn much more constructive on risk assets in the days ahead, although we are aware that downside risks related to a loss of confidence in global policy makers is a rising threat in a bear market case.

These market fears were also not helped by the news from VW last week.  Revelations that the company has been found falsifying emission figures on a grand scale has left investors fuming.  With speculation that costs associated with the scandal could rise towards $20bn, the credit worthiness of one of the most rock steady stalwarts of the Euro corporate bond market has been badly impacted, with CDS spreads rising from 75bp to 220bp in the matter of 3 days.

That this should happen in such a conservative and seemingly well managed company has shaken investors ability to trust all corporate management.  In a sense, if VW is found to be deliberately cheating, then who can you rely on?

With this additional uncertainty coming at a time of heightened nervousness and thin market liquidity, this has consequently contributed to a marked rise in spreads.

The past week has been a very difficult one with respect to strategy performance.  As we have been communicating over the past several weeks, we have been adding risk in corporate and sovereign credit and in currencies with the view that markets would perform well following the Federal Reserve meeting.

We believe that spreads should rally, with monetary policy remaining relatively dovish and we continue to look for additional monetary easing from the BoJ and the ECB prior to the end of 2015.  

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