Every quarter, our GFICC senior investors gather to formulate a consensus view on the near-term fixed income markets. The result of this is a strategy roadmap for the coming three to six months.

Scenario expectations

• Above Trend Growth is still our base case for 4Q 2021, but reduced to an 80%¹ probability in our current view, given central bank normalisation, the expiration of US unemployment benefits and the persistence of the global public health crisis. In our current view, the probability of Sub Trend Growth was raised to 10%¹ from 0% because the growth peak has passed and downside risks have risen. We believe the likelihood of a Recession and Crisis remains 5%^1, respectively.
  
  
• The reopening growth surge has appeared to peak, and there is some debate as to where US and global gross domestic product will settle. The Delta variant healthcare challenges have proven to be more material than originally hoped, while supply-side constraints are still evident and limiting growth. The US is about to transition away from enhanced unemployment benefits and China is tackling both mobility restrictions from its zero infection rate policy and the impact of increased regulation.
  

GFICC Scenario Probabilities and Investment Expectations: 4Q 2021⁴

4. Source: J.P. Morgan Asset Management’s GFICC Investment Quarterly (IQ). As of 15.09.2021. Opinions, estimates, forecasts, projections and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. There can be no guarantee they will be met. Above-trend: Global gross domestic product (GDP) growth >3.5%, inflation >2%; Sub-trend: Global GDP growth 2-3.5%, inflation 0-2%; Recession: Global GDP growth <2%, inflation <0%; Crisis: A disorderly movement in markets causes systemic impact and tail risk. Provided for information only and not to be construed as investment recommendation or advice. Forecasts and estimates are indicative, may or may not come to pass.

How transitory is inflation and what does it mean for central banks?

• Though supply disruptions are pushing inflation higher for longer-than-expected, we expect them to fade gradually. More persistent inflationary pressures are building up in some economies (US and UK) while anecdotal evidence from companies suggests cost pressures have been passed through to the consumer, protecting corporate margins.
  
  
• The Federal Reserve (Fed) has already stated its intention to start tapering its large-scale asset purchases. Details are expected to be announced later this year. We believe the Fed is likely to wait for a few quarters before the first rate hike, in mid-2023. Importantly, the inflation trajectory over the next two years, and how far rates need to ultimately rise, may determine how disruptive this round of Fed monetary tightening will be.
  
  
• The Bank of England also looks set to end its quantitative easing programme by end-2021, with a first rate hike in 2Q 2022. The European Central Bank should end its Pandemic Emergency Purchase Programme (PEPP) in March 2022, but maintain market support through the general Asset Purchase Programme (APP), with no rate hikes on the horizon. Lastly, the Reserve Bank of Australia has indicated further taper in February 2022, with the bond-buying programme to end by 3Q 2022 and a first rate hike in 2024.
  
  

Interest rates and inflation⁵

5. Source: BLS, FactSet, Federal Reserve, J.P. Morgan Asset Management. Real 10-year Treasury yields are calculated as the daily Treasury yield less year-over-year core CPI inflation for that month except for September and August 2021 where real yields are calculated by subtracting out September 2021 year-over-year core inflation. Data are as of 30.09.2021.

How we are optimising opportunities in current market conditions

• As part of the overall portfolio allocation, corporate credit³ remains our top conviction sector, supported by strong corporate earnings and declining default rate. Other ideas include US, Euro high yield³, leveraged loans and bank additional tier-1 (AT1) securities.
  
  
• We also prefer non-agency securitised credit² which is supported by strong consumer balance sheet; and short duration bonds² compared with long-end debt as interest rates will likely rise.
  
  
• Emerging market debt was absent among our top convictions² this quarter on concerns over the efficacy of some economies’ healthcare response to the global public health crisis and the possible slowdown in China.

Conclusion
 

Our GFICC team believes that economically, global growth has crested and the path forward could be bumpier. Investors, based on their investment objectives and risk appetite, could consider a diversified portfolio and tap into relatively attractive income and risk-adjusted return potential by investing flexibly across multiple debt markets.

This content represents our GFICC team’s current view and overall strategy provided for information only based on current market conditions not taking into consideration any specific investor’s investment objective and risk appetite. Not to be construed as investment recommendation or advice.

Diversification does not guarantee investment return and does not eliminate the risk of loss.

1. Source: J.P. Morgan Asset Management’s GFICC Investment Quarterly Meeting (IQ Mtg). As of 15.09.2021. Opinions, estimates and forecasts may or may not come to pass. Provided for information only. These represent GFICC team’s views under normal market conditions subject to change from time to time.
2. For illustrative purposes only based on current market conditions, subject to change from time to time. Not all investments are suitable for all investors. Exact allocation of portfolio depends on each individual’s circumstance and market conditions.
3. High-yield credit refers to corporate bonds which are given ratings below investment grade and are deemed to have a higher risk of default. Yield is not guaranteed. Positive yield does not imply positive return.

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