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

1. Source: US Bureau of Economic Analysis, Conference Board US, FactSet, US Census Bureau, US Department of Labor, Wards Intelligence, J.P. Morgan Asset Management. Indicators are: Business Confidence – Monthly survey of Chief Executive Officers about their outlook for the economy; Investment Growth – Monthly new orders of non-defense capital goods (excluding aircraft). Data reflect most recently available as of 30.09.2019.
2. 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.
3. Source: GFICC Investment Quarterly. As of 11.09.2019. 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. IQ: Investment Quarterly. 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.
4. Source: Bloomberg, developed and emerging market central banks. As at 31.08.2019, except number of hikes from developed markets which is as at 31.07.2019.
5. 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.
6. 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 which are debt securities backed by mortgage-related financial assets. These assets include residential and commercial mortgage loans.
7. Source: J.P. Morgan, Bloomberg. As at 09.09.2019. Yield is not guaranteed. Positive yield does not imply positive return. Past performance is not a reliable indicator of current and future results.
8. HY credit refers to corporate bonds which are given ratings below investment grade and are deemed to have a higher risk of default. Source: J.P. Morgan Asset Management, Bloomberg, Lipper FMI. Data from 01.01.2009 to 30.09.2019. Not all investment ideas are suitable for all investors.
9. Source: J.P. Morgan. As at 31.08.2019. Net supply includes coupon payments, maturities and tenders. Data is estimated off of the USD portion of the Bloomberg Barclays Global Aggregate Corporate Index.

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. 


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