I attended the World Bank and International Monetary Fund (IMF) Spring meetings in Washington D.C, and the main topic of discussion was US exceptionalism: the strength of the US economy and the dollar and the implications for other countries, including  emerging markets (EM).

Economists have been forecasting a US recession for the last 18 months. It hasn’t materialised, and the economic data in the US continues to be strong – though employment and inflation has softened recently. The US is powering ahead in terms of economic growth despite restrictive interest rates from the Federal Reserve (Fed).

The IMF raised its projections for 2024 global economic growth to 3.2% in April from the 2.9% forecast in October and nearly doubled its US growth forecast to 2.7% from 1.5%.1 The Wall Street Journal noted that based on IMF projections, the US will account for 26.3% of global GDP this year, the highest in almost two decades.

Growth in EM is more mixed, with China underperforming and India outperforming. The economies of Europe, Australia and New Zealand aren’t matching the US at the moment. Is inflation fading?

Late last year there were expectations of a soft landing or hard landing in the US. Last month, the Fed said that the strong economic data hasn’t given it confidence that inflation is easing. Services inflation, in particular, has been a problem.

Fed rate cut expectations in the marked have been rolled back sharply. On April 30, the 10yr US Treasury yield closed above 5% for the first time since November and has since fallen. But there may be more pain to come.

My view is that the market isn’t fully positioned for the US economic exceptionalism. In  December 2023, a Bank of America fund manager survey showed the consensus was for overweight positioning in duration. People are expecting long-end yields to come down. Looking at the data, I am not sure when that will happen.

One of the changes I have made in the sovereign opportunities strategy that I manage is to reduce duration positioning. This is about mitigating the potential for negative performance if the US data continues to surprise on the upside.

Meeting central bankers

At the IMF meetings there was a lot of focus on fiscal largesse, both in the US and elsewhere, and the view is that the dollar being the world’s reserve currency means the US Is able to print as much debt as necessary without out adverse impacts.  But Treasury debt issuance plans are getting much more scrutiny in the market.

The meetings offer an opportunity to hear from investors, World Bank and IMF representatives and central bank officials from countries around the world. I met with a number of EM central bank officials. Among their concerns were that domestic growth and inflation data suggests that easing of rates is warranted, but their currencies have started to depreciate — significantly in some cases – versus the US dollar.

Another theme at the meetings was the progress and normalisation in sovereign debt restructuring. Several countries are moving from defaulted to performing, and there has been an increase in more market friendly governments who are willing to engage in IMF programmes. Ecuador is one of these countries. Another, Zambia, has reached an agreement with creditors. The government of Ghana recently held private discussions with a bondholder group about restructuring Eurobond debt but failed to reach a final agreement; Sri Lanka’s Eurobond debt restructuring negotiations ended in a stalemate. In both cases progress was made, however.

In general, there is investor appetite for restructuring and achieving positive outcomes, and there is more normalisation in the credit spread part of the lower-rated sovereign debt universe.

Ukraine restructuring

One upcoming restructuring which is of interest is Ukraine. Ukraine entered into a standstill agreement with debtholders in August 2022, several months after Russia invaded, allowing for a moratorium on payments. The government doesn’t have to pay debt holders for two years, until  August 2024.

There is now a proactive effort to restructure Ukrainian sovereign debt in advance of the expiry of that standstill agreement. The IMF has put forward a framework for the public debt and medium-term targets for restoring sustainability. There was some concern that the recovery value would not be as high as expected.

Unconstrained and global

We have seen numerous examples of low-income and overly indebted countries that ran into difficulties during the Covid pandemic when commodity prices surged. These countries are starting to exit these situations.

As unconstrained, global and active investors in the government bond market, we see compelling  opportunities in the current environment, including restructuring stories. We also look to frontier markets such as Venezuela, Ecuador and Egypt or countries such as Turkey. These are idiosyncratic investment opportunities, uncorrelated to other markets that with prudent analysis can help to deliver differentiated returns for investors.

The IMF meetings highlighted some of these potential opportunities. We believe that by globally diversifying the portfolio, and by taking an active approach to choosing rates, sovereign spread or currency risk, we have the potential to deliver superior returns in our sovereign opportunities strategy.
1 https://www.imf.org/en/Publications/WEO/Issues/2024/04/16/world-economic-outlook-april-2024
The value of active minds – independent thinking
A key feature of Jupiter’s investment approach is that we eschew the adoption of a house view, instead preferring to allow our specialist fund managers to formulate their own opinions on their asset class. As a result, it should be noted that any views expressed – including on matters relating to environmental, social and governance considerations – are those of the author(s), and may differ from views held by other Jupiter investment professionals.
Important Information

This document is intended for investment professionals and is not for the use or benefit of other persons. This document is for informational purposes only and is not investment advice. Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested. The views expressed are those of the individuals mentioned at the time of writing, are not necessarily those of Jupiter as a whole, and may be subject to change. This is particularly true during periods of rapidly changing market circumstances. Every effort is made to ensure the accuracy of the information, but no assurance or warranties are given. Holding examples are for illustrative purposes only and are not a recommendation to buy or sell. Issued in the UK by Jupiter Asset Management Limited (JAM), registered address: The Zig Zag Building, 70 Victoria Street, London, SW1E 6SQ is authorised and regulated by the Financial Conduct Authority. Issued in the EU by Jupiter Asset Management International S.A. (JAMI), registered address: 5, Rue Heienhaff, Senningerberg L-1736, Luxembourg which is authorised and regulated by the Commission de Surveillance du Secteur Financier. No part of this document may be reproduced in any manner without the prior permission of JAM/JAMI/JAM HK.