Mixed performance for credit across spectrum

To say that Emerging Markets (EM) have had a topsy-turvy start to the year is nothing less than an understatement. The weakness witnessed in EM economic activity cannot be pinpointed to one or two factors but it has been the by-product of an endless web of market events and data point which, when combined together, formed a sour concoction for EM assets as a whole.

Global markets, both developed and Emerging Markets, are intertwined and interconnected in an endless number of ways, so EM were bound to be adversely impacted by a slowdown in the global trade and a strengthening of the USD from its 12 month lows.

Add the proposed US trade tariffs and resultant counterpunches by China and Europe in what had been already weak markets further exacerbated this trend. In fact, in the first 6 months of the year, trade flows into EM have ebbed at a rate not registered since February 2016. Recent weakness was also brought about by country specific news, such as Turkey and Brazil, the former's domestic currency plummeting by almost 20% in a short time span.

All is not doom and gloom however, as EM economies and corporations are in far better shape now than they were 2 years ago following the massive deleverage exercised. This fact, coupled with the recent slowdown could present some interesting opportunities in the EM world.

The month of June was characterised with a marked increase in risk aversion. Risk-off mode and flight to safety trade were prevalent for the better part of June as geo-political tensions in the form of trade wars between the US and their main trading partners as well as complications in the post Italian election derailed risk assets, sending spreads in disarray.

The major gainers from this volatility was clearly Investment Grade bonds, notably high grade sovereign bonds, as the majority of benchmark yields on European sovereign bonds within the AAA and BBB bucket declined, resulting in a positive price performance. This performance was quite contrasting to the lacklustre performance witnessed on the riskier assets as on the other spectrum, in line with their Eurozone counterparts, Malta Government Stocks had a positive month as yields declined across the longer end of the yield curve. This performance was commensurate with the uneasiness being faced by investors as they continued to take risk off the table and plough money into safer securities or hold on to cash with the idea of re-deploying those monies in the aftermath of a steeper price correction.