1Q 2020 bonds: where we see opportunities

Key takeaways:

The global economy is bottoming out and recession risk could wane with a thaw in US-China trade tensions, alongside rounds of central bank rate cuts.
Our Global Fixed Income, Currency & Commodities (GFICC) team has lowered the probability of recession to 25%¹ and lifted probability of Sub Trend Growth to 55%¹.
Our GFICC team’s strategy bias is towards taking calculated risks, and sectors such as emerging market debt (EMD) could be optimised with expectations of a better growth outlook and still-accommodative policy. Strong US consumption and stable fundamentals continue to respectively support US securitised debt and investment-grade (IG) credit.

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.

Our latest macro view

After a thaw in US-China trade tensions and rounds of rate cuts by 40-plus central banks globally, we have lowered the probability of recession to 25%¹ from 40%.
With the global economy bottoming out, particularly in emerging markets (EM) such as Brazil, Russia, India and Turkey, we lifted the probability of Sub Trend Growth to 55%¹ from 40%.
We believe, the biggest risk remains on the trade front. If China and the US cannot agree to a status quo with modest de-escalation, global economic growth could take a downward turn. As we enter into 2020, the US general elections will take center stage and an early look suggests that it could be difficult to find a moderate candidate who can win the presidency.

GFICC's scenario probabilities and investment expectations: 1Q 2020²

It’s probably a stronger backdrop moving into 2020

The global economy and markets were flooded with liquidity in 2019 as the US Federal Reserve and more than 40 central banks globally cut rates at a combined 60-plus times, with a cumulative 3,000-plus basis points (bps) in easing.
In the US, the combined 75bps in rate cuts led to a surge in home loan refinancing that freed up income for consumers to spend on housing and durable goods.
In EM, a significant amount of rate cutting and some fiscal stimulus out of China, the rest of Asia and Europe helped limit the downside. And this could be seen in the greater resilience of EM manufacturing purchasing managers’ indices (PMI) versus those in developed markets (DM).

EM PMI shows greater resilience over DM³

Where we believe the opportunities might lie⁴

Our GFICC team’s strategy bias has shifted from defensive towards taking calculated risks on expectations of a better growth outlook, still-accommodative policy, strong US consumption and stable fundamentals.

Securitised debt⁵: The market offers exposure to strong US consumption and a yield advantage versus other quality fixed income sectors. The combination of robust employment, moderate wage growth and fiscal responsibility is supportive for the consumer outlook. Commercial real estate prices generally remain firm as construction begins to taper and demand remains steady overall. Agency mortgage-backed securities (MBS) is also benefiting from reduced interest rate volatility. (Read more: Securitisation 101: What are ABS and MBS?)

Commercial and agency MBS offer value versus credit⁶

EMD: Our GFICC team believes EM will benefit from a better growth outlook and still-accommodative policy. Within EM, we favour segments that lagged the rally in corporate bonds and these include local EMD (Russia, Mexico, Peru and Indonesia) and currencies. Recoveries in several large and closed economies (Brazil, India, Turkey, Russia) could contribute the most to the pick-up in EM growth, and the structural slowdown in China continues with a shallow recovery likely in the second half of 2020.
IG credit: Supply technicals are supportive for the US market driven by expectations of lower gross issuance, sizable maturities and net tenders. Fundamentals also appear stable. Leverage for the IG universe continues to deteriorate, impacted by slowing operating performance of companies. The increasing rate of debt growth for US companies is also a contributing factor. Select IG credit offers incremental quality yield⁷ over US Treasury debt.

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Conclusion

Overall, the global economy is bottoming out and recession risk could wane with a thaw in US-China trade tensions, alongside rounds of central bank rate cuts. While our GFICC team seeks to take measured risks in select fixed income sectors, we remain aware that it is late cycle and valuations are higher. Our GFICC team’s high-conviction bond ideas still generally favour moving up in quality to help build resilience in a portfolio.

Access Portfolio Insights Publication: Our latest global fixed income views

1. Source: J.P. Morgan Asset Management's GFICC Investment Quarterly (IQ). As of 11.12.2019. 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. Source: J.P. Morgan Asset Management's GFICC Investment Quarterly (IQ). As of 11.12.2019. 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.
3. Source: J.P. Morgan Asset Management, J.P. Morgan, Bloomberg, Markit. As of November 2019.
4. 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.
5. Securitisation is the process in which certain type of assets, such as mortgages or other types of loans, are pooled so that they can be repackaged into interest-bearing securities. Examples of securitised debt include mortgage-backed securities (MBS) which are debt securities backed by mortgage-related financial assets. These assets include residential and commercial mortgage loans.
6. Source: J.P. Morgan (Morgan Markets); As at 13.12.2019. CMBS: commercial MBS. Indices used include Bloomberg Barclays US MBS Index (Agency MBS), Bloomberg Barclays Non-Agency US Aggregate CMBS Erisa Eligible Total Return Index (CMBS) and Bloomberg Barclays US Aggregate Credit – Corporate Investment Grade Index (US Corporate IG).
7. Yield is not guaranteed. Positive yield does not imply positive return. Past performance is not a reliable indicator of current and future results.

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.

The information provided is general in nature only and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information you should consider the appropriateness of the information having regard to your objectives, financial situation and needs. Therefore, before you decide to buy any product or keep or cancel a similar product that you already hold, it is important that you read and consider the relevant JPMorgan fund Product Disclosure Statement (PDS), which is available to download on this website and make sure that the product is appropriate for you. Before making any decision, it is important for you to consider these matters and to seek appropriate legal, tax, and other professional advice. Issued by JPMorgan Asset Management (Australia) Limited ABN 55 143 832 080, AFSL No. 376919.

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