Eyeing trades amid a struggling Chinese economy and opportunities in Turkish bonds and EM distressed debt

Published on 12 February 2024

Nick Eisinger, co-head of emerging markets at Vanguard

Nick Eisinger, co-head of emerging markets active fixed income fund at Vanguard, unpacks his views on a struggling Chinese economy and the wider implications on global markets. Despite the growing concerns for the world’s second-largest economy, he says it “doesn’t mean there are no trades in China” and discusses where there could be potential for the upside.

Elsewhere in emerging markets (EM), Eisinger discusses the recent shakeup at Turkey’s central bank and whether now is the prime time to invest in Turkish local bonds and foreign exchange.

Turning to riskier debt, the co-head of EM active fixed income provides a comprehensive outlook on the distressed debt markets and where he sees potential for growth and investment opportunities.

In this episode, he also looks at what could move markets this week and what might impact liquidity, as desks await important inflation data out of the US and the UK and GDP growth numbers out of Europe.

North America: Weekly Review and Outlook

  • US equities volumes fell week on week but remained elevated, with a skew to buying activity. Liquidity gradually worsened week on week.
  • US IG volumes fell but remained elevated, yet bid-ask spreads widened compared to the last week of January.
  • Data: US Inflation rate on February 13, initial jobless claims on February 15, and Producer Price Changes on February 16. Earnings e.g. Coca Cola
  • In primary equities: 4 IPOs expected to price at $26.8 million. The largest deal should be Metros Development at $8.5 million.

Europe and the UK: Weekly Review and Outlook

  • Equities volumes fell week on week but remained high and saw downward pressure. Liquidity worsened week on week.
  • Euro IG volumes remain high and bid-ask spreads widened and are wide for seasonal averages between 2019 and 2022.
  • Data: UK’s Unemployment rate on February 13, UK’s Inflation rate and the EU’s GDP Growth on February 14, and the UK’s GDP Growth on February 15.
  • In primary equities: There are no IPOs expected to price on European exchanges this week.

Transcript of interview

Jo Gallagher: Welcome to Trader TV This Week – your insight into how trading desks can prepare for the week ahead. I’m Jo Gallagher.

Today I’m joined by Nick Eisinger at Vanguard to discuss the main topics and events leading this week.

Nick, welcome to the show.

Nick Eisinger: Thanks very much for having me.

Jo Gallagher: Before we begin, let’s take a quick look at last week’s activity and what’s coming up.

In North America last week, activity across U.S. equities slowed week on week following a busy end of January. However, volumes remained elevated and markets continued to show a positive skewed towards riskier assets amid optimism that the economy is on course for a soft landing. The good streak of liquidity in equities saw cracks in the first full week of February, and spreads gradually widened going into the second month of the year. Last week’s investment grade volumes fell from the huge highs seen at the end of January, but levels were still elevated as investors are keen to lock in yields ahead of interest rate cuts this year.

Liquidity in US IG marginally worsened week on week, but bid-ask spreads match historical averages seen for the same week between 2020 and 2022. This week, markets should react to some important data coming out, such as the US core inflation rate on Tuesday, initial jobless claims on Thursday and the producer price changes on Friday. And Q4 earnings will also have a fresh batch of reports, including results from Coca-Cola, Cisco and Shopify.

In primary equities, there are four IPOs expected to price of $26.8 billion of aggregate proceeds. The largest deal of the week should be Metro’s development, which is seeking to raise $8.5 million out of the real estate sector.

In Europe and the U.K, last week European equities volumes continued to be high going into February, but much of that activity was downward pressure as EU markets fear the knock on effects of the struggling Chinese consumer. Market volatility across EU markets saw liquidity worsen in equities week on week and bid-ask spreads gradually widening over the last two weeks. Last week, Euro IG volumes fell from extreme highs seen at the end of January, but levels were still elevated as markets believe the fed could hold rates until May as trading activity slowed. Liquidity worsens week on week and better spreads were much wider than seasonal averages seen for the same week between 2019 and 2022. Europe will have a busy week for data, and markets can expect the UK’s unemployment rate hit on Tuesday. The UK inflation rate and the EU’s GDP growth on Wednesday, and the latest reading on the UK’s GDP growth on Thursday. Earnings out of Europe this week will include reports from Heineken, Airbus Group and Renault. In other regions, the Chinese market will be closed this week for the Chinese New Year. Despite last week’s single IPO the drought in European markets continues, with no new public offerings expected to price on exchanges this week.

Nick, we will be discussing emerging markets in this conversation. Put this week into context from me. What can we expect from liquidity, emerging markets and what should trading desks be focusing on?

Nick Eisinger: Well, liquidity I think, will remain a function of some of the data releases. In the US, for example, we’re going to be getting some inflation data, which is obviously a key factor the market’s been looking at for many months. It’s likely I think that that inflation data will be in concert with the idea that inflation has indeed peaked and is calming down. But clearly people will be looking for any signs hidden in that data, if you like, of any of the so-called supply chain issues that we’ve been hearing out of the Red Sea, and obviously the conflicts going on there and the increase in shipping costs. So that could be a somewhat delicate set of data releases. And it’s important because it obviously has implications regarding the path of the Fed this year. We all know that the markets in general entered the year with a very bullish view on how many Fed cuts there’d be. Somewhere in the order of six. Certainly in our portfolios, we never believed that. We do fairly firmly believe that the Fed will be easing policy this year, but certainly it’s not going to be six. And really that’s going to be a dominating factor. So CPI and everything around the Fed.

Jo Gallagher: Looking to China, what are your predictions for the Chinese recovery and how are you considering the risks to other economies?

Nick Eisinger: We do not think the Chinese economy is recovering anytime soon, despite the stimulus that has been imparted from the central bank and, to a lesser degree, the government. We believe that there’s a raft of structural issues, including debt overhang, including major ongoing issues with the real estate sector and associated excess supply in the housing market that will take a very long time to play out. That has implications for global economics. And it also has, perhaps more specifically, implications for emerging markets. Within the region, obviously, there’s a lot of other Asian countries with strong links to China, trade links, financial links, supply side links. I guess the positive news is that a lot of that is in the price.

The United States is perhaps the exception in terms of still fast growing GDP and economics, and we don’t really see that across much of the rest of the world. So you could argue a lot of that is in the price. Certainly that seems to be in the price of Chinese equities. That doesn’t mean there are no trades in China. And if you’re of the belief the Central Bank will continue to stimulate, you could be adding Chinese interest rate risks of buying Chinese duration 5 or 10 years, typically in ten, because obviously that is an investment that will typically do well in a situation where the Central Bank will be easing policy.

Jo Gallagher: Now turning to Turkey. The country’s central bank has had a shake up. Are Turkish local bonds and FX now a good place to invest?

Nick Eisinger: We think so, yes. The changes at the Central Bank have been taken quite well by the market. The bench of experience, if you want to call it that, is quite broad, largely comprising orthodox policymakers. And actually the replacement for the outgoing government is well known to the markets. And they have the ear of the finance ministry and most importantly, of the president as well. So I think the markets are still quite confident that this return to Orthodoxy will continue.

It has become a little bit of a crowded trade. We were fortunate to implement the local currency, a local bond trade, quite early on back in November. Those trades have rallied very significantly since then. They’ve stabilized a little bit since. So I think really the market wants to continue to see these signs of confidence. You know, transition of policymakers shouldn’t make too much of a difference. That’s what the market wants to see. And most importantly, probably from the second half of the year, the market will start to be looking for signs that inflation is actually stabilizing and starting to come down, perhaps quite rapidly. We don’t see that in the numbers yet, but of course we’re trying to be forward looking. And our view is the Turkish turnaround is real. It’s important. And even if things right now see yields increase as opposed to decrease, we may actually look at that as an opportunity to add additional exposure, particularly local currency exposures at better levels in the weeks ahead.

Jo Gallagher: Where are there interesting opportunities in distressed debt in emerging markets, and where are you taking those trades?

Nick Eisinger: There’s a range of countries where the markets have been distressed, their market access has been curtailed, but they’re still able to pay their coupons or their interest payments and to make redemptions. So you can be thinking about countries like Angola, like Egypt, like Kenya. And most recently we’ve seen a few markets in this region regain access to the Euro-bond space. So the Ivory Coast has done that, Benin that has done that. And these are all very positive signs that these are still performing countries, albeit distressed, will just continue to perform perhaps even better.

And then you have another group of countries which have already defaulted but are in debt negotiations with their creditors. That is complicated because the creditor base is very broad and includes Euro-bond holders, so commercial investors, as well as entities like the World Bank, the Chinese authorities and other bilateral creditors. Sometimes these interests conflict with one another, and I think that is why these negotiations have taken so long. Prices have initially risen in anticipation that the outcome to these deals will be very positive. About half to two thirds of the value you can already see in the price of those bonds. But I think you need to be patient and expect further delays. We do anticipate there will be something more positive coming through, perhaps around the turn of this year.

Jo Gallagher: Thank you, Nick for your insight and of course to you for watching. This has been Trader TV This Week.

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