GLOBAL FIXED INCOME OVERVIEW

Transcription

1 2016 Global Market Outlook Press Briefing GLOBAL FIXED INCOME OVERVIEW Edward A. Wiese, CFA, Head of Fixed Income November 18, 2015

2 Global Fixed Income Outlook: Summary Environment Developed market yields remain low almost everywhere. Volatility increased in the third quarter across sectors, currencies and rates. A surprise devaluation of the Chinese yuan, continued weakness in commodity prices, and increasing macroeconomic deterioration in many regions negatively impacted investor sentiment and prices in those regions. Looking Ahead Differing central bank responses to these developments and the deleveraging following the global financial crisis have caused regional divergences in yield curves and currencies. Credit markets have also begun to diverge. These divergences create opportunities. The slowdown in China and its impact on commodity-producing sectors and countries led to underperformance of bonds issued within those sectors and countries. Problems are not confined to China. A number of countries are encountering headwinds related to political and macroeconomic deterioration: Russia, Brazil, Turkey and parts of Southeast Asia. While the rise in EM debt is a cause for concern, reform potential offers promise. Some sectors and currencies have rebounded as investors found value more attractive. The recent recovery of riskier debt and emerging market currencies could be tested as growth remains fragile, market liquidity remains challenged and volatility remains elevated. 2

3 Sep-64 Sep-67 Sep-70 Sep-73 Sep-76 Sep-79 Sep-82 Sep-85 Sep-88 Sep-91 Sep-94 Sep-97 Sep-00 Sep-03 Sep-06 Sep-09 Sep-12 Sep-15 Yield (%) Developed Market Bond Yields 10-YEAR YIELDS (%) 20 U.S. UK Germany Spain Sources: U.S. Treasury. Deutsche Bundesbank: From March 1976 to December 1976 there were no bonds in circulation with a residual maturity of between nine and 10 years. Data prior to April 1973 are from IFS. Banco de Espana: Historical data prior to November 1991 are from Eurostat. Bank of England: Data for the latest month are updated preliminarily with figures from the Financial Times until official data are available from the Bank of England. Data prior to 1984 are from IFS. Haver Analytics. 3

4 (%) FX-Adjusted Yields: Low Everywhere 10-YEAR YIELDS (CURRENCY HEDGED BACK TO USD) Sources: J.P. Morgan and T. Rowe Price. 4

5 Divergent Monetary Policies Create Interest Rate and Currency Opportunities As of October 23, 2015 ILLUSTRATIVE INTEREST RATE CYCLE Brazil Interest rates down Philippines Interest rates up New Zealand India Interest rates stable Interest rates up China South Korea South Africa YTD Cuts May 2005 June 2006 U.S. 49 Hikes Europe Australia Canada UK. The two columns of cuts versus hikes are the actual cuts and hikes that have occurred YTD through August across countries worldwide. Source: These data reemphasize that divergent monetary policy is indeed occurring (rates and hikes). 5

6 Interest Rate Differentials vs. U.S. 10-YEAR YIELDS (%) 14 Brazil-U.S. India-U.S. Philippines-U.S. Germany-U.S Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Sources: Tullet Prebon and Haver Analytics. 6

7 Credit Markets Have Started to Diverge HISTORICAL RISK PREMIUM Option-Adjusted Spreads (%) U.S. High Yield Bonds Euro High Yield Bonds EM Hard Currency Sovereign Debt EM Hard Currency Corporate Debt U.S. IG Corporate Bonds Euro IG Corporate Bonds YTD Performance Last 3-Months Performance U.S. High Yield Bonds -2.53% -4.90% Euro High Yield Bonds -0.49% -2.27% 4 EM Hard Currency Sovereign Debt -0.07% -1.71% 3 EM Hard Currency Corporate Debt 0.85% -2.76% 2 1 U.S. IG Corporate Bonds -0.10% 0.83% Euro IG Corporate Bonds -1.84% -0.26% 0 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Performance in local currency terms unless stated otherwise. Sources: J.P. Morgan, Barclays, and T. Rowe Price. 7

8 Commodity-Related Bonds Have Been Severely Affected CUMULATIVE PERFORMANCE LAST 12 MONTHS Base 100 = September 30, Euro High Yield +0.24% U.S. High Yield -3.57% U.S. High Yield Energy % Ecuador Hard Currency % U.S. High Yield Metals/Mining % Local Brazil Expressed in USD % 50 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Performance in local currency terms unless stated otherwise. Sources: J.P. Morgan, Barclays, and T. Rowe Price. These indices reveal the bifurcation in the high yield market and how commodities have had an impact. 8

9 Credit Spread (basis points) Are Current EM Debt Valuations Justified? RISK PREMIUM Option-Adjusted Spreads in Basis Points U.S. Fiscal Cliff and EU Fragmentation Worries Taper Tantrum Commodity Crisis EM Corporate EM Sovereign 225 Source: J.P. Morgan. 9

10 Net Percent Increasing Change: 2007 to 2014 Broader EM China Syndrome As of October 12, 2015 EMs Following China Lower Rapid Debt Buildups Increase EM Vulnerability Debt (% of GDP) Debt Service (% of Income) Manufacturing PMI China EM Excl. China Oct-08 Oct-09 Oct-10 Oct-11 Oct-12 Oct-13 Oct-14 Oct-15 0 Sources: Bank for International Settlements (debt), national statistics agencies (current accounts, GDP), Markit, Haver Analytics, and T. Rowe Price. Details available on request. 10

11 Reform Potential in EM Should Not Be Overlooked Mexico Opening oil sector to private enterprise Media and telecom competition Education Brazil Fiscal consolidation Anti-corruption SOE governance Serbia Labor and pension reform European Union candidacy Indonesia Shift to manufacturing Tax collection Fuel subsidies India Fiscal consolidation Land acquisition Mining/coal rights China Anti-corruption Social (Hukou) Consumption growth Stronger growth and healthier balance sheets provide room for emerging markets to work through structural reforms. *SOE: State-owned enterprises. 11

12 Jun-67 Jun-70 Jun-73 Jun-76 Jun-79 Jun-82 Jun-85 Jun-88 Jun-91 Jun-94 Jun-97 Jun-00 Jun-03 Jun-06 Jun-09 Jun-12 Jun-15 Jun-79 Jun-82 Jun-85 Jun-88 Jun-91 Jun-94 Jun-97 Jun-00 Jun-03 Jun-06 Jun-09 Jun-12 Jun-15 Dollar Appreciation The Outlook for the U.S. Dollar Is Less Certain USD INDEX CURRENT VS. HISTORY USD INDEX 12-MONTH % CHANGE Dollar Index Average Dollar index is composed of euro (57.6%), Japanese yen (13.6%), UK sterling (11.9%), Canadian dollar (9.1%), Swedish krona (4.2%), and Swiss franc (3.6%). Sources: ICE US and T. Rowe Price. 12

13 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Currency: A Case-by-Case Story DEVELOPED MARKET CURRENCIES Base 100 = Dec. 31, 2014 Spot vs. USD EMERGING MARKET CURRENCIES Base 100 = Dec. 31, 2014, Spot vs. USD Euro Japanese Yen Canadian Dollar Chinese Renminbi Mexican Peso South African Rand Sources: Reuters, J.P. Morgan, and T. Rowe Price. 13

14 Important Information This material has been prepared for informational purposes only. The views contained herein are those of the presenter as of the date of the presentation and are subject to change without notice; these views may differ from those of other T. Rowe Price associates. Information and opinions, including forecasts and forward-looking statements, are derived from proprietary and nonproprietary sources deemed to be reliable; the accuracy of those sources is not guaranteed, and actual results may differ materially from expectations. Under no circumstances should this material, in whole or in part, be copied, redistributed, or shown to any person without prior consent from T. Rowe Price. This material does not constitute a distribution, offer, invitation, recommendation, or solicitation to sell or buy any securities. This material does not constitute investment advice and should not be relied upon as such. Investors should seek independent legal and financial advice, including advice as to tax consequences, before making any investment decision. The charts and tables are shown for illustrative purposes only. T. Rowe Price Investment Services, Inc US

15 THANK YOU.