After an interesting year to say the least for credit, 2020 looks to be marked by trade tensions, maintaining the improvements in banks’ credit profiles despite low interest rates and increasing conduct risk for some banks, and one prolific Tweeter.
Through the eyes of an investor, 2019 would have felt like a little rollercoaster, with periods of calm interrupted by bursts of volatility. Nerves and market gyrations could largely be seen around geopolitical events – like potent Tweets from President Trump.
In saying that, as the year drew to its final months, we see that investors and markets are becoming more accustomed to online provocations from President Trump, and are not reacting with as much velocity as when he was first appointed to office. Further, credit markets aren’t as reactive as faster markets, like equity, to this kind of prodding.
At a high level, it’s events like these which inform our views about how markets will perform, as well as the critical moves of and messages from central banks worldwide. In relation to the central banks, wording and policy has been accommodative and pushing towards stimulus in the face of low growth, which is encouraging.
With all that in mind, we expect much of the same for 2020, and are keeping a close eye on some key market events as we make strategy and allocation decisions.
Although it may appear like an intense environment, it’s important to remember that fundamentally, global banks are looking strong in our view, after repairing their positions and balance sheets in the years since the Global Financial Crisis. In the decade that’s passed, banks have been busy shoring up liquidity and capital, as well as ensuring a reduction in impaired assets.
That said, investors with an interest in credit markets should monitor:
1. Brexit: With Brexit, what we are eyeing is certainty and under what terms will the UK exit the EU, ie will it be an orderly or disorderly exit. Once we have that clarity, once and for all, we can better assess risk and pricing. Under the recently elected Boris Johnson, it appears Brexit is likely to go ahead, which is a step towards a known outcome. However, the finalisation of trade agreements could jeopardise the certainty especially given Johnson’s language.
2. Post-election spending in the UK: We suspect that the conservatives will go on a spending spree in the months post-election, which could hurt the fiscal position of the sovereign, but could also soften the weakness in the economy. This is important as the direction of the economy has an impact on the banks’ credit profiles. The recent Bank of England stress test also shows that the banks start with strong capital positions.
3. The US and China trade war: we agree with the view of our chief economist Shane Oliver on this one, who says an impending US election is likely to prompt President Trump to push for outcomes which enable market recovery. This will have an impact which reverberates through all manner of global markets.
Subscribe below to receive my latest articlesAndrea Jaehne, Senior Credit Analyst, Global Fixed Income
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