1 Credit and Fixed Income 30 January 2010 Philip Barleggs.
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Transcript of 1 Credit and Fixed Income 30 January 2010 Philip Barleggs.
1
Credit and Fixed Income
30 January 2010
Philip Barleggs
2CMINST-0336
Growth Strong growth, with variations
The global economy will probably experience strong growth in the first half 2010. Asia is set to shine while the major economies will be held back by muted consumption growth
Inflation Inflation in range
The significant excess capacity around the world should lead core inflation to decline until mid-year. Headline inflation has been rising because of commodity prices but is not expected to overshoot
Policy Removal of policy support
Fiscal policy is becoming less supportive. And monetary policy is being effectively tightened as quantitative easing (QE) ends. We expect policy rates in the G4 to remain unchanged in 2010
Global Economic Outlook
3CMINST-0336
Growth Outlook – US
Source: Thomson Reuters Datastream
1980 1985 1990 1995 2000 2005 2010
35
40
45
50
55
60
65
-4
-2
0
2
4
6
8
10
USA: ISM manufacturing PMI - lagged 1q (lhs) GDP growth (yoy %) (rhs)
Leading Indicators Point to Strong Growth in the US but questions remain about sustainability
4CMINST-0336
Growth Outlook – Europe
Sentiment suggests softer recovery in Europe
Source: Thomson Reuters Datastream
98 00 02 04 06 08 1060
70
80
90
100
110
120
-6
-4
-2
0
2
4
6
Eurozone: Economic Sentiment Indicator - lagged 1q (lhs) GDP growth (yoy %) (rhs)
5CMINST-0336
Inflation Outlook
Large Output Gap should act as a Drag on Core Inflation
Source: Thomson Reuters Datastream
1980 1985 1990 1995 2000 2005 2010
-3
-2
-1
0
1
2
3
4 -6
-4
-2
0
2
4
USA: 1y change in unemployment rate (%, 6m moving average) – lagged 7m (lhs)1y change in core CPI (yoy %, 6m moving average) (rhs)
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Supportive Drivers
Economic Recovery & Stimulus packages
De-leveraging continues, fundamental improve
Comparative position versus Sovereigns improving
Investment inflows
Credit Outlook
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Risk Factors
Sovereign debt crisis deepens
How overweight are investors already?
Credit Outlook
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Yield Level Gradually higher yields Economic growth, large government deficits, and the prospect of rate hikes will probably lead to gradually higher yields
Curve Curve to flatten - eventuallyWe expect curves to remain very steep for several months before flattening when investors start pricing in upcoming rate hikes
Inflation Breakeven inflation attractive in the USA, too high in EuropeFor US bond investors, TIPS are an attractive insurance policy against higher-than-expected inflation. We prefer nominals in the UK and in the Eurozone
Swap Spreads Swap spreads to tightenWe expect swap spreads to tighten, except for US swap spreads as their directionality to yields leave them vulnerable to a correction in bonds
Global Government Bond Strategy
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Yield levels Superior yield on corporates provides comfortable break-even levels
Flat spread curve enables capture of risk premiums at short maturities
Spreads Spread tightening is supported by improving fundamentals
Compression between rating bands has further to go
Overweight Corporate bonds
Economic recovery on track
Valuations attractive
Asset allocation inflows expected
Global Credit Strategy
10CMINST-0336
Central Banks – Lower for longer
Asset Reflation – Substantial cash reserves put to work
Focus Turns to Fundamental Data – Scaling back of official intervention
Macro Themes for 2010
11CMINST-0336
Higher Yields
Narrower Credit Spreads
Lower Volatility
Inflation: Is it Cheap?
Investment Themes for 2010