China inside out: onshore and offshore bond opportunities
Consider the income potential of China as inflation looms and rates stay low.
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Key takeaways:
- As the world approaches 2021, Asia is likely to continue to lead the global economic recovery while developed markets including Europe and the US struggle to maintain growth amid new waves of the infection.
- With the world at different phases of recovery from the fallout of the public health crisis, some investors are still navigating the uncertainty over how the crisis will unfold, inflation expectations and the direction of the US dollar (USD). We share our views.
The global economy and markets have been on a roller coaster since the onset of the public health emergency 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
Source: J.P. Morgan Economic Research, J.P. Morgan Asset Management. Data reflect most recently available as of 31.10.2020. Forecasts/estimates are indicative and may or may not come to pass.
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 public health crisis 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 public health crisis 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
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Navigating uncertain markets
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.
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Provided for information only based on market conditions as of date of publication, not to be construed as investment recommendation or advice.
Diversification does not guarantee investment return and does not eliminate the risk of loss. Forecasts, projections and other forward looking statements are based upon current beliefs and expectations. They are for illustrative purposes only and serve as an indication of what may occur. Given the inherent uncertainties and risks associated with forecast, projections or other forward statements, actual events, results or performance may differ materially from those reflected or contemplated. 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 circumstances and market conditions.
Investment involves risk. Not all investments are suitable for all investors. Past performance is not a reliable indicator of current or future results. Please refer to the offering document(s) for details, including the risk factors. Investors should consult professional advice before investing. Investments are not similar to or comparable with fixed deposits. 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. Estimates, assumptions and projections are provided for information only and may or may not come to pass. This document has not been reviewed by the SFC. Issued by JPMorgan Funds (Asia) Limited.
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