PineBridge Favours Emerging Over Developed Markets

Amanda Cheesley Deputy Editor 7 August 2023

PineBridge Favours Emerging Over Developed Markets

Michael Kelly, global head of multi-assets at PineBridge Investments, a US-based asset manager, discusses his multi-asset strategy, the outlook, his asset class convictions and positioning.

Michael Kelly at PineBridge Investments believes that the US economy has been quietly enjoying a significant fiscal thrust, delaying and lessening the impact of monetary tightening.

“This fiscal impulse will likely peak in the second and third quarters, from which point credit tightening should begin to dominate,” Kelly said in a statement last week. The reward for taking risk in Western markets is now even lower, encouraging him to maintain a cautious approach.

With fiscal support soon losing its upward thrust, economic momentum is expected to realign with the credit cycle, which Kelly sees weakening. “A mild recession is still likely, yet pushed out until year-end. Growth and pricing power still look poised to slow sooner than wage pressures, bringing down margins and creating a profit recession even as liquidity tightening ensues,” he continued.

Kelly summarises the trends and developments which could affect his positioning.

Kelly remains defensive on broader developed market stocks, particularly given current overvaluations combined with looming credit tightening and growing risk aversion by banks, along with a steady fiscal impulse to date in the US and ongoing declines in the US Federal Reserve and European Central Bank balance sheets.

He maintains a more favourable outlook on select emerging market equities. He expects these markets to benefit from increasing cash flows without resultant monetary restraint, which should reverse the extreme caution priced into China as it relaxes regulatory and monetary policy.

“This stands in contrast to likely reductions in both cash flows and liquidity in the US and Europe, with pricing that looks overconfident and appears to be pricing in an upturn off an immaculate landing,” he said. Kelly also likes Indian equities, which are secularly poised to accelerate amid rising foreign direct investment (FDI), which has slowly warmed to Prime Minister Modi’s policies. “India also benefits from a growing labour force and a refortified banking system that, along with FDI, is nurturing a nascent credit and investment cycle,” he continued.  

Fixed Income 
“The Fed aims to settle policy rates slightly higher for a longer period, with the potential of rendering the economy susceptible to growth shortfalls. Quantitative tightening will be the last restrictive lever to go. The Treasury’s rebuilding of its general account should also drain liquidity, creating temporary upward pressure on rates,” he said. Kelly believes that any overshoot in yields in the coming months will be an opportunity to extend duration.  

“Asia high yield (HY) currently presents a compelling and longer-lasting opportunity to earn high carry with very low duration. Compared to US high yield, Asia HY offers less breadth but with higher spreads, supported by improving credit fundamentals. This makes Asia HY a diversifying alternative for fixed income investors seeking spread-narrowing opportunities that complement core developed market portfolios, where the upcoming soft patch/recession offers more yield curve relief than any potential spread widening, at least when sticking with higher-quality credits,” he continued. 

“Commodities find themselves caught in conflicting crosscurrents, making their trajectory uncertain. China’s services-led recovery lacks the usual commodity tailwinds, while most developed economies are in a goods recession. A rebound in goods production would benefit commodities and Asian economies,” Kelly said.  

Within “green commodities,” he sees a high dispersion of expected returns: Aluminum and cobalt look quite attractive, while lithium appears unattractive. A significant divergence in supply growth is behind this divide, with less-appealing markets suffering from a glut of supply coming onstream due to prior investments.  

“New vintages in mid-market private credit vintages could benefit from pullbacks in regional bank lending, offering wider opportunities with improved spreads and terms,” he added. Kelly sees opportunities for equity-like returns in this space within fixed income. 

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