BNP Paribas Asset Management

It would be an understatement to say that the Trump administration has presented challenges for the Federal Reserve: with the economy operating at around full employment, the government has introduced the sort of fiscal stimulus typically seen in recessions.

August saw large drawdowns in emerging markets, reminiscent of the trend seen in the second quarter, as assets sold off over a number of factors, most notably the deteriorating economic situation in Turkey.

Today when we look at yield, we tend to see it only in absolute terms but when we compare the yield/equity risk ratio of debt and equity, debt remains attractive: it is less volatile, less risky and can provide a steady return over time. Moreover, security rights are provided in cases of default. The yield offered is thus linked to the risk, which is quite low. These assets still deliver – thanks to the illiquidity premium – an additional return of between 100 and 150 basis points over bonds rated in the same category.

Emerging market debt (EM debt) has been the subject of much interest over the last few years, but recent volatility has created uncertainty about the asset class. We are convinced that besides offering an attractive return/risk ratio and the potential for high returns, current valuations constitute an attractive entry point.

Infrastructure debt has become an essential asset allocation component for investors looking to diversify their credit exposure with assets offering steady cash flow, an attractive risk/return profile compared to fixed-income instruments with an equivalent credit quality.

The past few months have been dominated more by politics than economic news. A new government with a radical agenda has formed in Italy, triggering a seismic re-pricing of ‘peripheral’ eurozone sovereign bond spreads. Meanwhile, an established government was toppled in Spain, but the market barely blinked.

Following a volatile last few months, we foresee a pause and potentially a reversal in some of the prominent trends. In particular, we expect US Treasury (UST) yields and the US dollar to stabilise in the near term, as we believe UST yields have already priced in good news in terms of growth, inflation and monetary policy tightening by the Federal Reserve. By contrast, growth in the eurozone economy has slowed, but the ECB has signalled its intention to end its asset purchase programme by the end of 2018.

The way financial markets have moved over the past three months is a good example of the new and more challenging environment. Equity performance was mixed with positive returns in the eurozone, followed by the US, and EM equities trailing with negative returns.

The world’s two most populated countries, China and India, are also two of the worst air polluters. However, China is already using central government policy to drive through the transition to a cleaner energy balance, although it needs to extend its efforts beyond the industrial Northeast. Meanwhile, unlike China’s centralised approach, India’s fractured governmental structure will make the transition tougher, not least given the number of coal jobs in question.

Small and medium-sized enterprises (SMEs) are a vital component of the UK economy. They represent over 60% of private-sector employees and are recognised as a critical component of both innovation and economic growth. The essential problem for potential lenders to SMEs is that the investible universe of UK SMEs is enormous – involving some 5.7 million companies – and yet the credit approval process is the same for a GBP 500 000 loan as for a GBP 50 million loan.