- The global economy appears to be gliding towards a soft landing.
- With central banks adopting a more dovish stance and the world’s major superpowers continuing trade negotiations, the market environment could be supportive of bonds again.
- Short-term securitised credit, emerging market debt and high-yield credit are among our Global Fixed Income, Currency & Commodities (GFICC) team’s top picks for sectors to look out for this quarter1.
Every quarter, our GFICC team formulates 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. We share our insights for the second quarter of 2019.
Global growth: gliding towards a soft landing
- Global growth has lost some momentum with the outlook dragged down by extended US-China trade negotiations, which top our list of concerns. Still, don’t become too pessimistic.
- We believe the US economy remains in good shape. The consumer segment is enjoying a strong balance sheet, full employment and wage growth. Meanwhile, a combination of fiscal and monetary stimulus measures in China is likely to stabilise the economy and help counter the drag from trade pressures, which could drive emerging markets (EM) growth higher.
- In our opinion, a soft landing, with growth roughly at trend appears likely for the global economy. We lowered our base-case scenario slightly, Above-Trend Growth from a 50% probability to 45% and slightly raised the probability of Sub-Trend Growth from 35% to 40%.
GFICC scenario probabilities and investment expectations: 2Q 2019
Source: GFICC Investment Quarterly (IQ), as at 21.03.2019. 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%, 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, not to be construed as investment recommendation.
Central banks: dovish policy is here to stay
- The Federal Reserve’s (the Fed) unambiguously ending three years of monetary policy tightening not only left policy rates unchanged but also included a surprisingly detailed plan for concluding the balance sheet runoff. The Fed will tolerate higher levels of inflation and will only act if inflation expectations move meaningfully.
- With central banks signaling a more accommodative stance, the odds of a soft landing have increased, extending the late cycle - in our opinion, a recession happening in 2019 or early 2020 could be unlikely.
- A soft landing of the global economy, central banks’ dovish stance and the superpowers’ (US and China, the UK and the Eurozone) on-going trade negotiations may be supportive of bonds.
US inflation has been consistently below the Fed’s target
Source: Bloomberg, Bureau of Labor Statistics. Data as at 18.03.2019. CPI = Consumer Price Index. Past performance is not a reliable indicator of current and future results.
Bond markets: our top picks1
- Trend growth of the short-term securitised credit market remains supportive as we believe this sector will continue to benefit from continued strong consumer health.
- Historically, emerging market debt markets tend to benefit significantly with the Fed on hold, and we believe this trend will play out in the coming months. However, selectivity in EM vehicles remains key.
- High-yield credit still benefits from expected low default rates and low recession risk.
Securitised debt benefitting from continued consumer health
Source: FactSet, FRB, J.P. Morgan Asset Management, Bureau of Economic Analysis.
**1Q19 figures for debt service ratio and household net worth are J.P. Morgan Asset Management estimates. Past performance is not a reliable indicator of current and future results.
Guide to the Markets – Asia, 2Q 2019, page 24. Data reflect most recently available as of 31.03.2019.
1 For informational purposes only, exact allocation of portfolio depends on each individual’s circumstances and market conditions.
Investment involves risk. Investors should consult professional advice before investing. The opinions and views expressed here are as of the date of this publication, which are subject to change and are not to be taken as or construed as investment advice.