What’s in store for bonds in 1Q 2021 as economies reopen?
1Q 2021 bond themes and potential opportunities as economies reopen.
The global economy and markets have been on a roller coaster since the onset of the COVID-19 pandemic in early 2020. The US and some economies in Europe are still struggling to contain subsequent waves of infections while keeping economic momentum. We believe a U-shape recovery appears likely as these economies are expected to only fully recover towards the end-2021, or even 2022. On the other hand, domestic consumption and continued structural growth are driving recovery of some economies in Asia.
Real Gross Domestic Product (GDP) growth forecast
With the economies at various stages of recovery, market uncertainties persist. In this article, we share our perspectives on three macro headwinds that investors should be mindful of as they navigate the markets in 2021.
1. How effective are the public health control measures?
The COVID-19 pandemic continues to dominate the economic landscape. Mobility restrictions have been imposed in some locations to help limit the spread of the infection, and such measures are hindering some economic activities. Looking ahead, the momentum of economic recovery is largely dependent on effective control of the public health crisis.
China’s ability to contain the pandemic has enabled businesses and consumers to gradually return to normality. This is reflected in its swift economic rebound since the second quarter of 2020. We expect China to continue to lead the global economic recovery in 2021. In Europe and the US, we believe the economic recovery could improve if their governments can strike a better balance between tackling the health crisis and maintaining economic momentum. These economies have sufficient domestic demand to facilitate a rebound should policymakers find that balance. An effective vaccine, and successful distribution, can help to accelerate this recovery.
2. How real is the inflation risk?
Global inflation fell in 2020 on the back of the recession triggered by the public health crisis. This sets up a low base for 2021, which could see headline inflation rise. While economies are gradually recovering, developed markets are unlikely to return to the pre-crisis level of real gross domestic product in the near term. As unemployment rates are also expected to stay above average, demand-side inflation is unlikely to see a sharp pick-up in momentum.
With inflation unlikely to be an imminent threat, global central banks are expected to continue with accommodative monetary policies in 2021.
3. What is the outlook of the USD?
In 2021, the USD is likely to continue its depreciating trend because of the massive fiscal stimulus and rising current account deficit in the US.
While economic recovery could bolster the USD, the USD interest rate differentials against other currencies continue to narrow, dragging the greenback to trend lower. Meanwhile, we believe that a more predictable trade policy under President-elect Joe Biden’s administration is also expected to support risk appetite, and thus could soften the USD.
Read more: The Year Ahead 2021
As the world approaches 2021, market uncertainties are likely to persist. While the global economy is gradually recovering from the public health crisis, the pace of recovery differs in different locations. There are also unknowns to inflation expectation and the outlook of the USD. The key is how best to navigate and optimise the uncertainties.
Investors, based on their objectives and risk appetite, can consider diversifying their investments across geographies and asset classes, or even different sectors within a single asset class. A diversified portfolio comprising assets with low correlations could offer a wider range of income and growth opportunities, while helping manage portfolio volatility.