What’s in store for bonds in 1Q 2021 as economies reopen?
1Q 2021 bond themes and potential opportunities as economies reopen.
Uncertainty over the impact of the acute respiratory pandemic has caused big swings in financial markets in the past few months. Australian equities1, as represented by the ASX 200 Index, sank 23% in 1Q 2020, reversing their 23% increase in 2019. Australian bonds1, represented by the Bloomberg AusBond Composite (0+Y) Index, managed to stay in positive territory with a 3% return in 1Q 2020, but still lower than the 7% gain in 2019.
While market volatility has increased and the outlook is uncertain, investors could still find opportunities to seek positive returns and build robustness to different market environments as a part of their overall portfolio allocation.
By taking advantage of market mispricings of macro trends, the JPMorgan Global Macro Opportunities Fund seeks to achieve positive returns over its cash benchmark in up and down markets2 with expected annualised volatility of less than 10%. In 1Q 2020, the Fund generated positive returns each month3, and in April, volatility remained low and stable, despite the spike in market volatility.
So how could the Fund achieve this? It employs a macro, focused and flexible investment approach that draws on a broad opportunity set with the ability to take long and short exposures.
Generate macro themes
The Fund delineates the world into a set of broad macro themes that capture the key trends and changes that are driving asset prices over the short, medium and longer term. Through continual macro research, the Fund also seeks to position for unforeseen global disruptions such as the acute respiratory pandemic.
One of the Fund’s secular trends that has contributed to positive returns this year is the widespread adoption of technology. Technology trends reflected in this theme include the growth in cloud computing and ecommerce, which is expected to continue over the coming years and could even be accelerated by lockdown measures around the world as more people are working and shopping from home.
Since January 2020, the Fund began to invest in another long-term secular theme called climate change response. As we saw through 2019, governments, companies and individuals are focusing more on sustainable outcomes, accelerating the transition to a lower-carbon economy. The expected disruption is likely to be widespread for capital markets as targeted policies and regulation, as well as changing consumer behaviour, alter dynamics and create opportunities in industries such as power generation and transport.
Select focused strategies4,5
Once the investment team has defined the macro themes, they seek the most efficient reflection of these macro views from across a broad opportunity set of multiple asset classes and through long or short exposures. The Fund is benchmarked6 to cash so the team only invests where it finds the best expression of its macro views.
In March, the team took advantage of market moves to adjust physical equity positioning, reducing cyclical exposure and focusing on high quality (strong balance sheets), liquid names across favoured trends, such as cloud computing and e-commerce, the transition towards renewable energy in power generation, and select consumer stocks exposed to a potential China rebound.
The Fund held around 40 equity names, as of end-March 2020, demonstrating its focused nature, alongside positions in other asset classes.
Flexibility to seek opportunities in different environments4,5
One of the Fund’s key characteristics is flexibility. It is able to quickly shift its positioning as the macro view changes.
The Fund started 2020 with considerable equity risk against a supportive macro backdrop, but as the environment deteriorated with the outbreak and escalation of the respiratory disease, the team tactically reduced risk. This was achieved first through adding short equity exposure via equity options then via futures from March as options became more expensive and by reducing long equity position sizes or removing lower conviction names.
The Fund benefited from holding long Japanese yen and short Australian dollar exposure in January and reintroduced these again in recent weeks, along with other risk-off exposures such as short Korean won. In March, the team introduced gold which it believes should perform well in an environment of low to negative real yields.
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While risk assets rallied in April on hopes that sizeable stimulus would ease the devastating impact of the pandemic and that lockdowns would potentially be eased more quickly than feared, the Fund maintained a cautious stance as the sudden stop in global economic activity will continue to severely impact employment, incomes and profit outcomes over the short and medium term.
The investment team expects the market to increasingly focus on high-frequency activity indicators in the months ahead, and they will continue to monitor the duration of lockdown measures and the beginnings of exit strategies, as well as medical developments, and remain flexible to add risk if the macro backdrop shifts.
Even in uncertain markets, we believe that a macro, focused and flexible approach retains the potential to add value for investors.