Middle East Sovereigns Aiming At Emerging And Chinese Market Debts As Part Of Their Fixed Income Strategies
In what has been a rollercoaster year for financial markets, Invesco looks ahead to 2021 with a more optimistic outlook against a backdrop of positive COVID-19 vaccine news and continued support of central bank policy easing.
“Fixed income plays an important role in Middle East sovereigns’ portfolios as part of a diversified investment strategy,” said Josette Rizk, Client Director, Invesco, Middle East and Africa. “The preference towards emerging debt and Chinese debt has been on the rise due to the nature of the economic recovery following the COVID crisis, as well as the interest rate environment, which is more interesting from a return perspective in the emerging market universe versus developed markets.”
“The longer-term growth outlook for the global economy continues to improve,” said Rob Waldner, Chief Strategist and Head of Macro Research, Invesco Fixed Income. “Most recently, the news that a number of vaccines are proving effective at preventing COVID-19 has bolstered the case for a strong year of growth in 2021.”
The global economy experienced an unusual recession in 2020 – one induced by public policy following a health crisis – rather than an economically driven one. The exit from the recession has been more rapid than expected as most countries were able to resume much of their economic activity, and in those regions that experienced renewed outbreaks, the spread of the virus was limited without full lockdowns. Production and sales have been recovering sharply in the sectors less exposed to the virus, such as construction and manufacturing.
Policy support has been quick and effective, according to Invesco. “On the fiscal side, governments have offered an unprecedented amount of income support and loan guarantees,” said Waldner. “Monetary stimulus in the form of forward guidance and quantitative easing was quick and effective. The private sector still has the ability to borrow, which we have seen with the high levels of activity in the housing sector in the US, for example.”
Invesco anticipates that global recovery from the COVID-19 shock will likely support external demand, including for commodities which are essential for several emerging markets. The global backdrop is support for risk and emerging market assets in general. “After physical restrictions on activity were lifted in Q2, industrial production began to normalize and we have seen emerging markets exports pick up, leading the recovery in several of these economies,” said Waldner.
Invesco believes that the positive indications of a step towards a viable vaccine and rollout have reignited hope and will recharge the global recovery.
The COVID-19 pandemic created an economic and liquidity crisis for corporates following government lockdown measures designed to slow the spread of the virus, unlike the Global Financial Crisis which was driven by a banking crisis. Capital levels are materially higher today.
These positive developments have helped drive valuations across most risk assets, including investment grade corporate bonds, with index level valuations having recovered since the onset of the global pandemic. According to Walder, “Low growth and low inflation combined with extremely accommodative monetary policy is conducive to high quality corporates, and taken together with well capitalized banks, reduces the probability of default.”
