Artisan Canvas

The decision-making process and subsequent market reaction to central bank actions largely dictated financial headlines over the past few weeks. As a recap, the European Central Bank, the US Federal Reserve and the Bank of England all implemented 75 basis point rate hikes. These increases came in an effort to stave off persistently high inflation prints in their regions, including 9.9%, 8.2% and 10.1% annualized rates of inflation in September, respectively.

In mid-October, EMsights team members traveled to Washington D.C. to attend meetings around the International Monetary Fund (IMF) and the World Bank Group annual meetings. Given that uncertainty permeates the macro backdrop, it came as no surprise that the meetings held a somber tone. Given Russia’s invasion of Ukraine, Fed tightening and the global inflationary environment in general, uncertainty and bearishness abound. Ultimately, the IMF opted to lower its global economic growth outlook for 2023 to 2.7%, down 0.2 percentage points from its most recent outlook in July, and lower than its projection for 3.2% growth in 2022.

The convergence of rising interest rates, high inflation and slowing growth have roiled global financial markets, including emerging markets (EM) debt. The Federal Reserve’s rate hikes are taking place against the backdrop of tightening by many central banks in developed and emerging markets. We believe these factors are fueling risk-off sentiment for EM fixed income assets.

All eyes have been focused on inflation over the course of 2022. Ours too! Most of the attention has been given to the developed world and for good reason—inflation is the highest it’s been in over 40 years for many countries. Consumer prices remain volatile and elevated across much of the world, denting investor optimism for easing inflation and less aggressive interest rate hikes. One country’s recent inflation print really caught our attention. One hint: They do not have an Inflation Reduction Act.

Low interest rates have been a defining feature of the investing landscape in recent years. The rate on the benchmark US 10-year Treasury Note has been in a 40-year downtrend (Exhibit 1), leading to sub-3.0% yields for the better part of the past decade.

For those in the northern hemisphere, it’s been a volatile summer for emerging market bonds. The asset class has swung between gains and losses amid concerns about rising interest rates, high inflation, slowing growth and the Russia-Ukraine conflict. Then in late-August, Federal Reserve Chairman Jerome Powell’s speech on sustained higher interest rates rattled global markets, halting a rally in risk assets.

If you’re of a certain age you’ll probably recall those Got Milk? commercials that were omnipresent in the mid-1990s. It was one of the all-time greatest ad campaigns, becoming a cultural touchstone. Seeing as milk consumption per capita in the US has been decreasing for at least 20 years, the milk producing industry might want to consider dusting off its old playbook. Though not entirely clear why Americans are drinking less milk, the decline is at least partially explained by an aging population. 

Demographics might be hurting milk consumption, but aging populations in the US and other major economies are a distinct tailwind for income-producing securities, including dividend-paying stocks.

**FED HIKES 75BPS, INITIATES QT, TARGETS FOOD INFLATION. FED CURES BIRD FLU, LIFTS FOOD EXPORT RESTRICTIONS IN FOREIGN COUNTRIES, SHIFTS WATER TABLE FROM FLOODED FARM AREAS TO DROUGHT AREAS, RELEASES WHEAT FROM STRATEGIC GRAIN RESERVE, INCREASES BABY FORMULA PRODUCTION.

There’s been no shortage of volatility so far this year as building inflationary pressures and increasingly tighter monetary conditions have led to spikes in volatility across interest rates and risk assets. Across credit markets, de-risking has become more common as investors price in their expectations for higher policy rates and the potential impact on global growth. Uncertainty continues to drive price action in the near term, but through the noise, growing pockets of value are emerging across the high yield landscape.