Markets benevolent for credit investors in Q119

The first quarter of the year was a breath of fresh air for investors from the adverse market condition registered in the latter stages of 2018; markets were bolstered on the back of the dovish approach taken by both the Federal Reserve and the European Central Bank.

Economically speaking, we are seeing positive signs from the trade war talks as President Xi and President Trump have formed a common ground. This has in fact given investors a boost in confidence as assets continued to rally. Having said that, the Investment Managers erred on the cautious side, acknowledging however that global economic data was nothing to be exuberant on.

Throughout the quarter, credit spreads tightened, as benchmark yields were driven lower. Worth mentioning however, that with the sharp decline in yields, spreads ended the quarter well above historical lows, which gives room for further possible spread tightening from this point forth. There was also a marginal yield curve inversion of US Treasuries at the end of March due to the estimated global growth slowdown. That being said, the soft figures from China have made a U-turn to the positive; from factory activity reaching a three-year low in February, March proved to be a better month as strong manufacturing data was seen. Without a doubt, this helped ease investor worries as markets saw a shift from risk-free assets to more risky assets.

Moreover, Brexit still remains at the forefront of investor uncertainty having ended the month of March with the Parliament not agreeing with May’s divorce plan from the EU. To make matters worse, British lawmakers had to vote on various alternatives on the first day of April only to once again have no plan.

In line with the trajectory of risky assets, Emerging Market (EM) economies have gained momentum and steam since the turn of the year, and have continued to throughout the first quarter. Meetings between President Trump and President Xi have led to positive triggers in the market as trade war talks are reaching a common ground. In addition to that, the Fed’s dovish stance remains a benefit to EM currencies as they remain within their current. Should current market conditions remain, EMs should continue at this pace.

China’s positive news was a boost to EMs and overall, EMs are living up to a positive performance. That being said, in March, Turkey experienced turmoil to its currency after Erdogan wanted to ban JP Morgan from writing up reports, this after analysts suggested that investors should short-sell the Turkish lira. To make matters worse, the political uncertainty increased as Erdogan was seen to lose in polls in Ankara and Istanbul. The Turkish lira was down 2.5% against the U.S Dollar after recovering losses, and this negative sentiment had a ripple effect on Turkish names in particular.