Markets to stay volatile, as coronavirus fears dampen EM growth, says Bluebay

Fears over the coronavirus outbreak will drive volatility in global markets for some time, according to BlueBay Asset Management, which suggested re-orientating portfolios away from cyclicals and towards duration and carry.

Emerging markets has seen a particular squeeze over the past week, with EM equity down some 5 per cent at one point as the S&P dipped 2 per cent, BlueBay observed in a research note.

In EM fixed income, returns from hard-currency credit were supported by a rally in core rates, which saw 10-year US Treasury yields tighten 18 basis points tighter as investors repriced growth expectations. Spreads widened meaningfully, with 10 bps of widening on investment grade and more than 20 bps on high yield. EM local markets were down more than 1 per cent on the week, with FX markets sliding as investors sought safety in the US dollar.

“It remains impossible to determine the full impact of the coronavirus on global growth because the number of new infections has not yet peaked,” Anthony Kettle, senior portfolio manager, emerging markets at BlueBay in London, observed in the commentary.

“Until it does, we feel that markets will remain volatile as it is hard to trust the economic data, particularly in light of the usual distortions from the Chinese Lunar New Year.”

As a result, Kettle expects core rates will remain “well supported for now” as the full impact of Q1’s slowdown is felt. 

“For now, we believe prudence would suggest re-orientating portfolios towards duration and carry, and away from cyclicals. Looking further ahead, we feel there will come a time when investors look for the second-quarter recovery in data as the effects of stimulus measures are felt and this may be the time to look again at cyclicals.”

Kettle added: “We feel that emerging markets should be well placed to benefit from investor flows on the back of the hunt for yield, but it is also fair to say that a stabilisation in Chinese growth and a pick-up in growth in other parts of EM was a core part of the thesis this year. This needs to be challenged in light of the impending first-quarter growth slowdown, but for now we think easy liquidity conditions will rule the day.”