Credit and EM debt offer attractive relative value trading opportunities, says BlueBay’s Kettle

As global equities markets on both sides of the Atlantic continue to flutter, credit and emerging markets are throwing up comparatively attractive trading opportunities, BlueBay Asset Management, the London-based fixed income and credit-focused hedge fund, said on Thursday.

Against a backdrop of renewed US-Chinese tensions, and a potentially protracted period of weak US growth, the recent positive rebound in US and European equities halted earlier this week, with the S&P 500 sliding 2 per cent at one point, and the Euro Stoxx 50 down 5 per cent.

On the flip-side, emerging markets fared better, down a little over 1 per cent as Asian markets outperformed, BlueBay said in a market commentary.

Anthony Kettle, senior portfolio manager, emerging markets at BlueBay in London, noted how credit markets have lagged recent US equity moves, throwing up an “interesting” valuation gap.

“If the downside in equities remains limited as a result of the policy supports that have been put in place, then it is reasonable to assume some spread compression from here, with the added benefit of the carry,” he said.  “The elevated level of primary issuance in investment-grade markets has been capping spread compression but we believe issuance is likely to slow into the summer months.”

Kettle added EM local markets are an “obvious catch-up trade”, given the combination of light positioning and valuations.

“We feel the bigger picture remains that central banks are able to aggressively cut rates, given a lack of inflation and a severe growth slowdown, meaning rates markets are the preference over FX, despite valuations that favour the latter,” he said in Thursday’s note.

In EM fixed income, hard currency markets were marginally tighter on spread this week, returning between 50–100 basis points, while local markets suffered small losses, down around 40 bps as FX markets were squeezed by broader macroeconomic weakness.

Equity markets globally have proven “surprisingly resilient” lately, Kettle said, with the initial Covid-19 wave seemingly having peaked, and economies now beginning to reopen.

But he warned that meaningful gains in equities would likely prove thin until virus reinfection rates fall further and there is progress made on vaccines or a treatment, observing how equity performance has been closely correlated to news around potential medical breakthroughs on the virus.