In this video, Stephen Thariyan, Co-head, Developed Markets, BlueBay Asset Management, discusses the evolution of global bond markets and how BlueBay has adapted their investment techniques over the past five years to exploit heightened uncertainty in the markets.
View transcript
How do you invest in fixed income in today’s uncertain environment?
It is interesting: I mean, bond markets were never supposed to be this interesting. We’ve come off 10 years of both Q.E. and trillions of dollars coming into markets to try and support global growth and also sustain the credibility of financial institutions (the grist-of-the-mill of any company, and any country). And that’s been achievable, to an extent. But now, as we go into a Q.T. world, where we’re retightening bond mass, suggests that as rates rise, return from fixed-income securities will go down—it may even be negative, to the point about being in fixed-income securities becomes slightly pointless.
But that assumes that the level of Q.T. out there is commensurate with growth, and we’re not necessarily seeing growth across the world—so if you look at the U.S., the Fed is theoretically on pause. The Eurozone isn’t growing, there’s a concern about the ‘Japanification’ of emerging markets; the usual array of concerning situations when you look at areas such as Argentina and Venezuela.
So, really, it’s about having an investment environment where there’s uncertainty, and with uncertainty you get volatility. With volatility, you get alpha generation, or the potential for alpha generation. So, all the old methods of applying credit analysis, corporate analysis apply: having global portfolios, looking at different strategies, using different instruments can be applied. But here’s the weird thing, one of the biggest reasons countries are operating in a way that is sometimes unusual, is because, in a way, the popular voters are affecting what they do.
So, if you look at the U.S. in terms of Trump; if you look at the U.K. in terms of Brexit; if you look at Italy in terms of a disparate government going to the ECB with rather disparate policies; if you look at France with a new president inventing a new party; if you look at Spain in terms of how devolution may work there, it’s all pretty uncertain. So what we have to do is employ new techniques to try and understand how we can exploit that uncertainty.
How have investment techniques changed over the past five years?
Investment techniques have changed: I mean, I’m a credit analyst by background. In the old days, it was very much about understanding companies, financial modeling, and that still is the same. But it’s interesting: if you walk around the trading floor now—our trading floor, now—you’ll see as many Twitter screens as you see trading screens—The important element is information flow. So, you look to see how governments have been influenced by the popular vote; we have to see how it can then influence our judgement about investing, so we talk to policy makers, we talk to central banks, we try to see how governments are changing and how their economic analysis is being incorporated.
So, the great extent of information flow isn’t through financial markets, it’s through social media, and sometimes the flow of that information is a lot quicker. What we do need are the instruments that we can apply to try and exploit that uncertainty. And to that extent, the instrument bands has changed, optionality’s been introduced, but the useful information from social media is often as important as pure financial analysis.