Mind Greece, Fed rate hike and pressure on EM currencies

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Mark Dowding, co-head of Investment Grade, BlueBay Asset Management comments on his investment strategy in light of the situation in Greece, the prospect of a Fed rate hike and recent pressure on emerging market currencies.

Over the course of last week, it seems as if financial markets have started to prepare for the summer lull, with risky assets largely paused for breath.

With respect to Greece, the near term implementation risks for a third programme have subsided somewhat with the Greek parliament passing a second set of policy measures demanded by its creditors with a strong majority (230 out of 300 votes). With a stronger dollar, lingering concerns of a Chinese hard landing, lifting of Iran sanctions and a higher crude oil inventory build-up, we have observed a steep decline in oil prices and commodity prices over the past two weeks.

On the US economic data front, existing monthly home sales data surprised to the upside. In our opinion such data is crucial for our analysis of the US economic outlook, and if this underlying strength continues it should lead to above trend growth for the second half of 2015 and a FED gradual rate lift off in September. Within Corporate Credit markets, after the substantial tightening observed the week before last, markets have been fairly subdued with cash spreads only marginally tighter last week.

Strategy performance was flat with outperformance from the corporate credit book largely offset by underperformance emanating from our sovereign credit book. Our long bias in CEE and Emerging Market sovereign credits detracted from overall returns as they generally closed the week marginally wider on spread.

We remain constructive on these holdings as fundamentals remain solid and improving, but with recent pressure on EM currencies, the sovereign credit markets have also weakened in sympathy. In terms of changes to portfolio positioning, we have added risk both within corporate and sovereign credit.

On the corporate side, we have increased exposure primarily via attractively priced new issues in sectors that have meaningfully underperformed/lagged the move tighter, such as European Subordinated Insurance.

On the sovereign side, we have increased our longs with a new position in Portugal and have added to existing exposure in Slovenia via an attractively-priced new issue.  We have made no changes to our duration positioning and we continue to carry no FX risk at this point in time.

Looking ahead, we continue to maintain a positive view on risk assets for the near term. With cross asset market volatility falling to year lows, a seasonally low upcoming supply period, improving European data, and focus returning to back the powerful dynamic of ECB QE, we expect spreads to continue their grind tighter with compression being the theme.

Dark clouds are however gathering on the horizon, with September having the potential to be a tricky month for risk assets with the prospect of a Fed rate hike, a surge in primary supply as well as potential Greece political developments.

With these risks in mind we are acutely aware of keeping the portfolio liquid and nimble, monetising profits in the coming month and potentially opportunistically looking to add to downside protection. But for now, it feels as if we can focus on the summer lull, with the path of least resistance seemingly for tighter spreads.

 

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