Monetary policies still being extremely accommodative, fixed income markets have become increasingly expensive.
"Now that the risk of recession is rising, the question of how value can be extracted from this asset class has become a thorny issue."
says Mohammed Kazmi, along with other industry experts during the Asset TV Masterclass.
Argentina’s liquidity crisis has raised some concerns about the future of emerging economies. Although that crisis is more of a special case than a risk of contagion, Mohammed Kazmi advocates a “wait-and-see mode” on emerging markets. In his view, as we are in this late-cycle environment, it’s not relevant to be long emerging markets across the board. There is a need for being “a lot more selective” and cautious. With data such as exports from Asia and the global PMIs still looking negative, things have to stabilise “before we can see some of these export-orientated economies really starting to perform” again, he states.
The Macro Strategist also points out central banks’ shrinking room for manoeuvre in addressing the global economic slowdown and deteriorating market sentiment. The Federal Reserve has been put in such a difficult situation by President Donald Trump that Chairman Jerome Powell is struggling with his communication, says Kazmi. The 120 basis-point cuts the market is pinning all its hopes on seems a little too much, warns Mohammed Kazmi, adding “we think that the Fed could underdeliver versus market expectations.” Taking into account the fact that the leadership is about to change at the European Central Bank, which adds uncertainty, investors will face further volatility in the coming months.
"Dealing with such an environment requires flexibility."
stresses Mohammed Kazmi.
Liquidity, he asserts, can be optimised within bond funds through CDS indices: “This is one avenue where we can add risk and remove [it] very quickly [and] very easily.” On corporate bonds, Mohammed Kazmi sees opportunities in bank debt. Contrary to common belief, corporate bonds in the banking sector do offer some value, he says. Although Switzerland and Europe have had negative interest rates for a few years now, banks are still providing positive earnings, states UBP’s expert. Their capital ratios have improved significantly and interest margins haven’t suffered too much. Above all, fee income has grown in line with loan books. He concludes:
“There is still a lot of positive you can take from negative yields,”
Senior Analyst Portfolio Manager & Macro-Strategist