- The macro environment remains mixed as the impact of ongoing trade tensions is gradually playing out.
- Our Global Fixed Income, Currency & Commodities (GFICC) team believes that most central banks are likely to respond and to encourage more governments to increase fiscal support.
- In our GFICC team’s view, the key to bond investing this quarter is to become more defensive, and shift up in quality as the recession probability increases.
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
- The macro environment remains mixed. Low unemployment and healthy consumer confidence continue to support the global economy. Still, the ongoing trade tensions have created a downturn in global trade and manufacturing. At the same time, business confidence1 is trending down and investment growth1 has slowed.
- The threat of increasing trade tensions and tariffs is gradually playing out, and governments appear unwilling or unable to provide fiscal stimulus. That leaves central banks holding the fort to keep possible recession at bay.
- Our GFICC team’s outlook for the fourth quarter of 2019 has shifted, where Recession and Sub Trend Growth are equally likely. In our view, the probability2 of recession has doubled from 20% to 40%, Above Trend Growth has reduced from 25% to 10% and Sub Trend Growth from 45% to 40%.
GFICC's scenario probabilities and investment expecations: 4Q 20193
The role central banks can play
- Escalating trade tensions are dragging down global manufacturing, and there’s little hope of any fiscal stimulus to lift the growth momentum. All eyes are on the central banks and their willingness to offset the global downturn through aggressive policy tools utilised early in the post-financial crisis period.
- We believe most central banks will have little choice but to respond and to encourage more governments to increase fiscal support. Indeed, the US Federal Reserve has cut interest rates three times this year and other central banks in both the developed and emerging markets have followed suit.
The rate cycle has turned4
Where could we find opportunities5?
Our GFICC team’s strategy bias is to become more defensive, and shift up in quality as the recession probability increases.
- Securitised debt6: The securitised market still shows high-quality carry with a defensive return profile, underpinned by the strength in US consumer spending.
High-quality carry profile in agency mortgage-backed securities7
- High-yield (HY) corporate bonds8: we believe risks are building up but might not be imminent. With rising recession risk, the likelihood of defaults has climbed but that is still in a benign stage. Technicals remain supportive with demand for HY bonds exceeding supply by over US$190 billion since 2017.
HY bonds’ demand exceeding supply since 20178
- Investment-grade (IG) corporate bonds: We like short- and intermediate-maturity IG corporate bonds, with a bias towards quality. While fundamentals are showing early signs of cracks with rising leverage, technicals remain robust because of strong demand and manageable supply.
Supply dynamics are supportive for banks9
With stocks near their highs and credit spreads near their tights, we believe that risks are asymmetric, even as probabilities are symmetric. In our GFICC team's view, the key to bond investing this quarter is to become more defensive, and shift up in quality to help build resilience in a portfolio.