Active Thinking

At GAM Investments’ latest Active Thinking forum, two of our brightest investment minds discussed ongoing global supply constraints and commented on European financials.

29 November 2021

Michael Biggs – Global Macro & EM Debt

Despite China’s recent weak growth, particularly in areas like the property sector, we believe the credit impulse is turning. Chinese policymakers have begun to stimulate the economy through mechanisms such as strong local government bond issuance. While China still faces headwinds from power outages, the return of Covid-19 and the difficulties in the property sector, these factors are on their way to being resolved. As such, we hope to see a strengthening in December’s Purchasing Managers’ Index (PMI) which would show that the stimulus is coming through, Chinese growth has bottomed and some of the downside risk is taken out, which will be significant for all asset classes. Elsewhere, we see a trio of supply constraints as a cause for concern. The first, shipping, has seen no improvement in numbers yet, although price pressures are beginning to ease. The second, the semiconductor shortage, is looking slightly more hopeful. Countries which manufacture semiconductors for cars, including Vietnam and Malaysia, shut down aggressively during Q3 to address a Covid-19 resurgence but the picture is improving. We hope to see an increase in semiconductor supply translate into car sales numbers. The third constraint is a shortage in US labour supply. The current participation rate is 2% lower than it was at the end of 2019, where in other regions, including Canada, Europe and Japan, it has almost recovered to pre-pandemic levels. Should this segment of the US workforce choose not to return to work, then that could potentially reduce spare capacity in the economy and create more persistent inflationary pressures.

Gregoire Mivelaz – Subordinated Debt

European financials had a strong Q3 earnings season. In fact, when looking at solvency ratios, the sector has never been as solid. We believe that subordinated debt of European financials remains an attractive asset class with low sensitivity to interest rates. It is also one of the highest yielding asset classes among liquid credit markets. Demand for such instruments also remains strong. A soft patch in mid-September, following concern for the Chinese real estate market, has had a short-term impact on price appreciation. Looking ahead, banks appear to be relaxed about inflation numbers because inflation can, at least in part, be attributed to increased monetary supply from central banks. The market may not be prepared, though, for how temporary the inflation period will be. Government debt to GDP in the US has doubled since the global financial crisis, and we may well see more negative real rates in the future. For investors seeking income, we believe subordinated debt can be part of the solution. Valuations are attractive and technicals are supportive.