Stone Harbor CIO: Institutional investors are most concerned about a potential recession

Institutional investors are most concerned about growth and a potential recession, while inflation is now less of a concern, said James Crage, co-chief investment officer and head of emerging markets at Stone Harbor Investment Partners, a global lending specialist with a background in emerging markets. debt of developed markets, in an interview.

“Growth fears — especially the risk of a recession — are driven by lower capital goods and manufacturing, tighter lending standards, contraction in the money supply and rising global short rates,” he said. “Although we do not predict a significant global recession, the fear of it will dissipate after a while.”

Given the firm’s view that the economy is not in danger of “a significant global recession, but we are seeing modest growth over the medium term,” Mr. Crage sees returns investment as attractive.

“A huge amount of value has been created in the fixed income sector — value that we haven’t seen in some sectors for several decades,” he noted. In particular, he is bullish in three sectors, some of which overlap:

  • The debt of countries and corporations that should benefit from China’s recovery. “We think you should invest in companies that sell their products to China,” said Mr. Craige. Accordingly, he favors US dollar denominated debt of exporters in Latin America, Africa and parts of Asia.
  • The debt of countries that have raised policy rates aggressively and now have high real rates and declining inflation. “Emerging market economies started the recovery cycle earlier and behaved more aggressively than their developed-country counterparts,” he said. “It worked as inflation slows but leaves many countries with high real rates that should eventually come down. We prioritize debt in the local currencies of Brazil, Mexico and South Africa.”
  • He also likes high-yielding emerging market sovereign debt, as more than 85% of this segment trades below par.

Mr Craige also said that while interest rates have risen around the world, they have recently stabilized. “We believe the Fed has moved to a less hostile relationship with the market given the slowdown in data growth and the recent decline in inflation,” he said. “Ultimately, this should lead to a decrease in fear and an increase in risk appetite. We’ve started to see some of it now that some sectors of the fixed income market are recovering substantially.” He cited high yields in the US and Europe as two areas where spreads have narrowed “significantly”, while investment-grade global corporations have also shown a “noticeable recovery”.

While the traditional 60% stock/40% bond portfolio has come under fire given how bad stocks and bonds have been this past year, Mr Craige counters that fixed income is “very attractive” now and that institutional investors should increase that allocation.

“Volatility (in bonds) is lower than (in) equities, and given the change in rates, the outlook for overall returns is as good as it has been for quite some time,” he added. “We have seen this amount of value created – absolute returns – only a handful of times in the last couple of decades. In terms of asset allocation, fixed income can now provide the volatility damping characteristics that people have used it for historically and provide a comeback as well.”

Stone Harbor manages $10.2 billion in assets.

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