VP Bank Positive On EM Bonds

Amanda Cheesley Deputy Editor 12 April 2024

VP Bank Positive On EM Bonds

VP Bank, a Liechtenstein-headquartered private bank, believes that there is plenty of positive news from the economy and financial markets, with the Japanese Nikkei index going up and business sentiment amongst companies improving. Despite the good news, VP Bank thinks that it is important to remain wary – go out and invest, but don't throw all caution overboard. 

With economic indicators improving, VP Bank believes that short-duration US high-yield bonds and emerging market bonds offer yield advantage, and that Chinese equities are on the way back.

VP Bank highlighted how an improvement in the global economic environment appears to be in sight, but the situation is still difficult. The US Federal Reserve, which has its sights set on cutting interest rates, is communicating this. However, if the US economy continues to grow, the need for interest rate cuts may be questioned, the bank said in a note. The better-than-expected labour market figures for March show that the US economy is continuing to perform well.

Recently, small and medium-sized companies have reduced their employment expectations. Overall, this points to poorer figures from the labour market in the coming months and, consequently, to interest rate cuts by the Fed. However, if these indicators prove to be a smokescreen, VP Bank thinks that the Fed could be forced to rethink.

Emerging market bonds
“Yields on emerging market bonds have remained stable – despite a slight rise in market interest rates measured at the long end of the US yield curve. Conversely, the risk premiums on emerging market bonds have fallen. This shows the high level of confidence currently enjoyed by emerging market debt instruments,” Dr Felix Brill, chief investment officer at VP Bank, said this week. "In any case, VP Bank feels that its positive assessment of this market segment has been confirmed, so it is therefore maintaining its overweight position."

The economic situation in China, which is still tense overall, also appears to be improving slightly, which VP Bank also sees as a positive development.

Japanese equities
For a long time, Japan was not a favourite of investors. Persistent deflation, stagnating stock markets and an often opaque corporate culture meant that investors preferred to invest in other regions. But that has changed, VP Bank said. The Japanese financial markets are undergoing a structural change.

After years of deflation, the country is on its way to a new normality and overdue corporate governance reforms are now being implemented. Increasing share buybacks, a more attractive dividend policy, a stronger focus on shareholder value and activist investors pushing for higher returns on capital are making Japanese shares attractive to investors again, the bank added. As a result, the most widely-followed Japanese share index, the Nikkei 225, climbed to a record high. The previous highs date back to 1989. VP Bank said it holds a neutral position in Japanese equities.

Other wealth managers such as Swiss private bank Julius Baer and BNY Mellon Wealth Management also favour Japanese equities in 2024. See more here.

Demand for physical gold remains high, particularly in Asia, while speculative investors are increasingly jumping on the bandwagon. But while the price of gold has reached record highs, Brill said that the recent rally is being viewed critically and many investors are holding back. In March, listed gold funds recorded outflows for the tenth time in a row.

“Newly-launched bitcoin funds could also reduce demand, as some investors compare the cryptocurrency to gold, in addition to bonds with attractive interest rates. While the environment remains attractive, the air has become thin in the short term. If the economy remains robust and speculative positions are being liquidated, it may lead to setbacks,” Brill continued. VP Bank has therefore decided to take profits and is underweight in gold.

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