My name is Kyongsoo Noh, and I am a portfolio manager on the ultra-short duration team here at JPMorgan Asset Management. Welcome to the 2021 Q1 Guide to the Markets audio commentary for Global Liquidity investors.
Needless to say, 2020 was an outlier in many ways. The first part of the year saw pandemic induced economic shutdowns, capital markets illiquidity and steep investment drawdowns the likes of which we may never see again during our lifetimes. But if you had held on to your investments through this tumultuous period, you would have been rewarded with decent returns across multiple asset classes.
The economic recovery from Covid-19 started in earnest midway through last year due to synchronized fiscal and monetary stimulus across the globe and increased medical knowledge of the virus. We see that recovery continuing this year, but after a speedbump in US GDP growth in Q1 due to the current virus surge.
Our discussion today is going to be in 3 parts. First, I will talk about Covid-19, GDP, the labor market and corporate profits. Then, I will reiterate our thoughts from this past Q4 about the Federal Reserve (Fed) and easy monetary policy. Finally, I will end on some strategy thoughts for short term fixed income investors.
We start on p. 59 of the Guide where we show the shape of the development by region of Covid cases (on the left) and Covid fatalities (on the right).
From the right hand side of both charts, we can see the recent surge in cases and fatalities here in the US. As a result, authorities have increased localized restrictions that may even be expanded once the Biden administration takes office later in January. These restrictions will be a drag on US GDP growth in Q1, maybe not enough to cause an outright contraction, but enough to take GDP to about 1% annualized growth. With numbers on the case and fatality charts at levels as high if not higher than what we saw in March, why do we not foresee another deep contraction this quarter? (1) there is less fear amongst the population on conducting daily tasks – we do have a lot of deaths and I am by no means diminishing them, but the fatality rate today is around 1% whereas last March, it was around 10%, (2) work from home capabilities and other technological solutions are driving productivity gains, and (3) fiscal stimulus has and is keeping the more vulnerable segments of society afloat; in sum, we are much better prepared to deal with the virus now than we were 10 months ago
After Q1, we see growth picking up in the US as vaccines are distributed, the latest round of fiscal stimulus works its way through the system, the Fed remains easy, and pent up demand for goods and services is unleashed. To help visualize the shape of the recovery we turn to p. 22 in the Guide where we show US GDP data. Looking at the left chart, we have GDP as a time series.
Although the line in the chart is put together using 2012 dollars, to make things easier to digest, I am going to frame the numbers in the chart in percentage terms. From peak to trough, we lost 10% of output due to the pandemic; we have recovered 7 out of that 10% so far. We expect about 5% or more real GDP growth this year, which means we will surpass 2019’s output sometime in 2021, but it will probably take until the end of 2022 for the US to get back to the up-sloped dotted trend line. In the near term, surging virus cases and fatalities are causing shutdowns that will curtail Q1’s output; therefore, the left chart will be flattish for a quarter or so before the V shape comes back. Now, 5% is not unreasonable for 2021 GDP growth even incorporating a slow Q1 when you consider that the stimulus package just signed into law in December was sized at $900 billion or about 4% of GDP; with the Georgia runoffs going to the Democrats, there is potential for even more stimulus in the next couple of months – so 5% GDP growth for 2021 may be conservative
Another way to take a look at the recovery is to analyze the labor market. On p. 30 of the Guide, we have unemployment data in grey and wage growth data in blue. We are going to focus on the former, but first, I will mention a few things about recessions. Traditional recessions are caused by imbalances; taking the Global Financial Crisis (GFC) as an example, there were imbalances caused by too much capital and labor going into the housing sector eventually causing a bubble then a crash. It is not on this page, but in 2006, we had just over 1mm jobs in residential construction; as of November 2020, that number was 835k; here we are 14 years later, and residential construction jobs still have not fully recovered; there was an imbalance, a bubble, a crash and then a long road to recovery. The recession of 2020 was caused by a virus, not by imbalances; once the world is sufficiently vaccinated, even the most affected industries like say hospitality and leisure are not going to take decades to recover like we saw with the residential sector after the GFC; on the right side of this chart we see a very skinny inverted V showing just how fast the recovery is running its course. I am not saying that there are not jobless people out there suffering, there are – in fact the labor market shrunk by 140k jobs in December and we expect to see another negative number for January but the labor recovery should be faster than what you normally see in traditional recessions
The last way we will break down the recovery is by looking at corporate earnings. On p. 7 of the Guide, we have historical and projected earnings of the S&P 500. Years with positive earnings growth are the gray bars, drawdown years are marked by the green bars, the current consensus estimate forecasts are the blue bars. Over the last 35 years, we have had 3 economic recessions, one following the first Gulf War in the early 1990s, one following the dot.com bust, and one following the GFC; each of those recessions had periods of earnings drawdown that lasted 3 to 4 years. We also had a 2 year earnings drawdown during the oil price sell-off of 2015-2016, but that was not technically an economic recession because GDP did not decline during that time period. Now, we have the Covid recession of 2020, which was one of the sharpest and deepest downturns in US history, and yet we are only expecting one year of earnings drawdown (indicated by the short blue bar for 2020 on the right) – as with labor, we are seeing a quicker recovery now than we have seen in traditional recessions. Earnings growth itself will be driven by business efficiencies forced by the virus, low capital costs, and unleashed pent up demand. Some sectors will do better than others, but overall, this bodes well for credit fundamentals in general; we are expecting less ratings downgrades, less write-downs on bank balance sheets, and faster earnings growth looking forward from now than we did 6 months ago.
So what does all this mean for the liquidity investing space? As we mentioned last quarter, the biggest driver of front end performance is the Fed and zero interest rate policy (ZIRP), which is depicted here on p. 37 of the Guide. Although we expect strong growth and job gains over the next couple years, we still think the Fed will be on hold until 2023; this is because back in August of last year, the Fed implemented an average inflation targeting regime (AIT) for making interest rate policy, which means they will tolerate a period of time with inflation running above target to make up for a period (like now) when inflation is running below target; this sets a high hurdle for the to Fed to switch back to tighter monetary policy. It may be some time before we see rate hikes, but over the past couple of quarters, some providers in the money market fund industry have implemented net yield floors to varying degrees on different funds benefiting end users. With a net yield floor in place, when the gross yield of a fund portfolio falls below a specific threshold, the provider will work to cut management fees in order to maintain a minimum yield for shareholders. Bear in mind that yield floors could be temporary and are subject to change, but depending on the portfolio, the floors can make certain funds more attractive than others for liquidity investors.
This brings us to our summary. Economic shutdowns used to counter the current surge of the virus are likely to soften growth in Q1 to about 1%. Beyond Q1, growth should accelerate to 5% or more for the remainder of the year due to vaccine distribution, fiscal stimulus, easy monetary policy, and pent up demand. Recovery is coming quicker that you would normally see for a traditional recession because this downturn was caused by a virus and not economic imbalances. Despite an expectation of an acceleration in the recovery later this year, we still believe the Fed will keep zero interest rate policy (ZIRP) in effect until 2023
ZIRP will limit returns in the front end of the curve, but there is value for liquidity investors in different money market funds depending on whether you are looking at government or credit funds and what yield floors providers have set. Ultrashort strategies are also a great option to pick up yield for those who are willing to take a little more duration and spread risk.
To explore these topics further, please reach out to your JPMorgan Asset Management representative. Thank you for listening, and we look forward to speaking with you.
Hi, this is James McNerny, portfolio manager on our ultra-short, Managed Reserves, or ultra-short duration team wishing you a Happy New Year! We hope that you and your loved ones are well, and that your 2021 is off to a great start.
The fourth and final quarter of 2020 was characterized by a continued strong tone in risk markets, building on the improvement in growth indicators seen in the third quarter.
Global equity markets rallied for the third straight quarter, while fixed income credit spread tightened and credit curves flattened. Lower quality paper outperformed its higher quality counterparts, indicating a demand for yield, as investors were willing to accept lower risk premiums for longer dated and lower quality credit risky bonds.
In October, concerns surrounding the impending US Presidential election, as well as the pandemic and the reopening of the economy caused stocks to sell off and risk assets to trade softer in general. COVID concerns were warranted, as new infection rates rose sharply in Europe and the UK at first, followed by the US, overtaking previous highs and stressing healthcare services, particularly intensive care capacity. These concerns were somewhat offset by the November 9th revelation by Pfizer that their trials found their vaccine to be 90% effective in preventing COVID-19. As would be expected, the market received this news well and risk assets subsequently rallied. Anecdotally, the S&P 500 was up approximately 11% in November after being down 2.6% in October, as depressed value sectors quickly came into vogue while “stay-at-home” sectors lagged.
In short term fixed income markets, interest rates in the front end of the curve were low and range bound through the quarter, with the 2yr US Treasury trading in a muted 7 basis point range around its average yield of just 0.15%. Credit spreads continued their tightening trends albeit at a slower pace given the sharp moves over the prior two quarters. As noted earlier, credit curves were flatter on the quarter, so the spread tightening in our space was muted relative to longer bonds. Anecdotally, 1yr spreads were tighter by approximately 8 bps in single A rated bonds and 11bps in BBBs, versus their five year counterparts which tightened by 30 and 39bps respectively.
Even with rates low, we saw continued investor interest in the ultra-short space. In fact through November 30th, Morningstar reported year-to-date net new cash flows of $31.4B into the space, placing it in the top ten for net new flows by category. While that may be surprising to hear given the lower level of current yields, it’s not when you dig beneath the surface. In March and April we saw assets in US Dollar Money Market funds balloon by about $1.2 Trillion. Only about $500 Billion of that money has since been reallocated, leaving US Dollar Money Market Fund assets at approximately $4.3 Trillion dollars today. And we live in a world where everything is relative, so that is $4.3 Trillion that is now earning yields very close to zero given the cuts to the Fed Funds rate earlier this year. So it makes sense that those investors may look to take the next step out the curve into the ultra-short space, pick up some additional yield but not take on too much duration to do so. Especially as we enter the new year with some renewed concerns that inflation could push intermediate-to-longer end yields higher given the prospect of further stimulus from the new administration and congress. Such concerns will typically limit the desire to add significantly to duration to portfolio, especially with rates at starting points as low as they are currently. So an allocation to an ultra-short duration strategy can help to allay those concerns. And for those reasons, higher yields than money market funds with limited duration risk, it makes sense that we continue to see interest in this space. In fact, here at JPMorgan, assets in our Managed Reserves (or Ultra-short duration) platform surpassed $100B for the first time during in the fourth quarter. So to all of you who have helped to get us there, thank you.
As for our thoughts on positioning portfolios in the space…..with Treasury rates so low, we don’t see much value in owning that sector, at least not in large size. Instead, we have been running a longer position in short term credit, primarily via investment grade corporate bonds. We have also become increasingly comfortable again with exposures to the US consumer through consumer related asset backed securities, particularly given the prospect of further stimulus to help bridge consumer incomes through the pandemic.
One last item to note is the issue of the sun-setting of LIBOR rates, which was originally anticipated to take place at the end of 2021. In November, a coordinated communication was sent from a number of regulators in the US and UK pushing back the expected cessation of most LIBOR fixings to June 2023. Prior to this announcement, we had been limiting our purchases of LIBOR based floaters to maturities inside of 2021. However, we are now comfortable extending those purchases to bonds with maturities out to mid-2023, which gives us another tool to add yield to portfolios without adding much duration.
Should you have questions or wish to speak, please do not hesitate to contact your J.P. Morgan asset management representative who would be happy to put you in touch with us. In the meantime, thank you for joining the conversation, please take care of yourselves and stay healthy and safe.
Hello everyone, my name is Juan Lois and I’m on our dedicated Sustainable Investing team, leading our Clients Solutions for the Americas. Today I will walk you through what sustainable investing means for us at JP Morgan Asset Management, focusing on how we integrate financially material Environmental, Social and Governance factors into all our actively managed strategies.
Sustainable investing can mean something different to everyone, so I would like to first start with what it means for us. We use sustainable investing as the broad umbrella term for all investment strategies that consider Environmental, Social, and Governance factors in the investment process. At its core, sustainable investing is a forward-looking investment approach that aims to deliver long-term sustainable financial returns in a world that is changing rapidly.
This last part is key, as the world is fundamentally changing and at a faster pace than ever before, we must be forward thinking with our investment process. . Whether it is the rise of all types of goods and services produced in sustainable ways, or the proliferation of data that provides greater transparency on how companies operate – the world has and is increasingly shifting in ways that create additional E, S and G risks that we as investors have to consider in our investment process if we are to produce the same financial returns that our clients have always expected of us.
Said another way, at JPMAM we believe that explicit incorporation of financially material ESG information in the investment process can help deliver enhanced risk-adjusted returns over the long-term. Think of ESG as data. It is extra-financial information that can help us make better informed investment decisions. For this reason, over the last several years we have been very focused on making sure all our actively managed strategies incorporate ESG information in the investment process, which has resulted today in over $2 trillion in ESG integrated assets under management.
While we ensure each investment team aligns to a set of standards, we also make sure that each asset class and investment team has their own implementation process – which includes deciding exactly which ESG issues are financially material for their given strategy. This is critical as a risk from an equity perspective might be very different from a risk for fixed income products.
As we look at Global Liquidity and our money market products, they too consider the E, S and G factors that can impact a company’s ability to successfully operate and generate returns. Our credit analysts evaluate a range of ESG issues to better understand the extent to which the issuers we lend to on behalf of our clients can navigate and manage the ESG risks they face. This evaluation, which includes our own proprietary analysis as well as 3rd party research like MSCI, is reflected in our issuer recommendations and our approved purchase list – which directly impacts concentration and tenure parameters.
As part of our general research process, we actively engage issuers on all financially material risks – including ESG issues – and we incorporate the insight gained from these conversations with issuer management into our analysis and recommendations. Because of JPMAM’s size and the frequency in which we work with the same issuers, these conversations and resulting investment decisions can have a real impact on an issuer’s access to capital.
Looking ahead, we are building on the tremendous amount we learned from each of the investment teams during the ESG integration process and are creating a proprietary ESG score. The score will incorporate insights from our fundamental sector analysts, a range of external data sources, and new AI and data science capabilities to identify forward-looking ESG risks and opportunities.
We are also focused on going beyond ESG integration to build a suite of sustainable products that aim to better capture opportunities associated with the transition to a more sustainable future.
To wrap up, we are really excited about these efforts and the commitment from our entire firm. If you have any questions or if there is anything, we can do to assist you on your own sustainable journey, please don’t hesitate to reach out to your JP Morgan Asset Management Representative. Thank you.
Hi, I’m Neil Hutchison, lead portfolio manager for our international ultra-short duration portfolios.
In a year like no other, the fourth quarter of 2020 did not disappoint in terms of high drama. As we approached the final few months of the year, we, as investors, were concerned about market tail risks pertaining to; US elections, Fiscal sign offs, time running out on the Brexit saga, and most importantly vaccine developments. The fact that ALL of these risks were surmounted in a market friendly fashion is in its own way remarkable.
Taking each in turn:
For President Biden , the market hopes he will be less confrontational than his predecessor . The Democrats now have a narrow majority in congress, increasing the prospect of more stimulus for the US. That said , the slim majority may limit some of the more ambitious part of the Democratic agenda regarding corporation taxation and tighter regulation for big tech.
For Fiscal developments, we know central banks are “all in” but with rates on the floor and balance sheets bulging , central banks must be close to the limits of what they can do with respect to conventional and unconventional policy. This means for further support we must look to governments. Q4 illustrated that despite challenges surrounding politics, governments were able to step up and support via the fiscal channel. Late in the year, the U.S. Congress finally approved pandemic relief plan that will extend many of the CARES act measures, further supporting households and improving unemployment benefits. Markets further cheered when the European [Nextgeneration] Recovery fund cleared initial hurdles, this fund should be ratified early in the new year, providing both vital support as well as a show of unity from the Eurozone.
For Brexit, it was always going to be the 11th hour, and the 11th hour meant a deal was cut on Christmas eve. Striking this deal averted the worst-case scenario of “Hard Brexit” where the UK would be forced to trade on World Trade Organization rules. That said, the deal can best be described as “skinny” and at first glance hits services harder than some goods. Only time will tell if Brexit will ultimately be a success in economic terms. Near term frictions coupled by lack of preparedness from business will act as headwinds for the UK in 2021.
Most impressive of all was the positive surprise we received regarding efficacy of the vaccine trails in November. The Pfizer BioNTech , Moderna and AstraZeneca/Oxford vaccines all proved highly effective at reducing cases of COVID-19. The speed at which these vaccines have been developed …. tested, … approved and now distributed is perhaps the biggest story of Q4. This development allows the markets, to look through the near-term pain in the hope that the mass vaccination programmes will allow a less restrictive existence in the second half of 2021.
Looking back on Q4, the news flow was relentless. For Global Central Banks, well they certainly grabbed some column inches in the quarter, but were far easier to read. We have gotten used to the “whatever it takes” approach from Central bankers and late in the year, they didn’t disappoint.
In the US – In December Chair Powell did welcome “light at the end of the tunnel” thanks to the vaccines, …. But he also stressed there would be no hasty withdrawal of support. The Fed has signaled they’ll hold interest rates near zero through at least 2023, and promised to keep buying bonds at a monthly pace of at least $120 billion until “substantial further progress” had been made toward the targets for maximum employment and 2% inflation.
In Europe, with the deposit rate at negative 50bps, the European Central Bank (ECB) appears reluctant to go lower preferring to focus on Targeted Longer-Term Refinancing Operations (TLTROs) and Quantitative Easing (QE) channels. In December, the ECB increased its emergency bond-buying program by 500bn Euros to 1.85 trillion Euros and sweetened the terms for banks to borrow via the TLTROs.
In the UK, with bank rate at 10bps, the question remains whether the Monetary Policy Committee (MPC) will need to test negative interest rate policy (NIRP) over the next 12 months. A key development in 2020 was when the Bank of England (BoE) explicitly said NIRP is now part of their tool kit. With another national lockdown ahead and a skinny Brexit deal acting as a headwind for economic growth, market pricing sees Sterling Overnight Index Average (SONIA) heading towards zero by the end of Q1 2021. Current market suggests the MPC will pull the NEGATIVE POLICY lever by year end. We expect this debate to play out through the year.
As we glance into 2021, it appears that ultra-low rates and with-it rock-bottom money market yields, are here to stay.
In terms of our 2021 outlook, the phrase its always darkest before dawn springs to mind. With the new COVID mutations and increasing cases forcing governments into ever more restrictive measures, near term economic pain will be palpable. That said we are entering into this phase, safe in the knowledge that our scientists have, at breakneck speed, found a vaccine.
We hope , 2021 may end up being a year of 2 halves, first half focused on global health and vaccine roll out, leading to a second half of rapidly improved social restrictions and a marked pick-up in economic growth.
For markets, especially front end credit markets, central bank forward guidance points to rates staying at current or lower levels throughout 2021. The liquidity mountain and central bank QE support should also keep credit spreads from widening; meaning the low for longer mantra remains firmly intact.
Thank you for your time today. If you have any questions, please reach out to our team or your JP Morgan Asset Management Representative.
Hi I’m Joe McConnell, lead portfolio manager for our European liquidity strategies.
As we leave 2020 behind, now is a good time to take stock of what we saw from the European Central Bank (ECB) last year and think about how policy might evolve in 2021. I’ll also touch upon what it may mean for money markets.
The December ECB meeting set the tone for the year ahead. The theme was very much an extension of those measures taken earlier in 2020, to deal with the challenges ahead.
While there were multiple prongs to the ECB’s December announcement lets for now concentrate on 2 policies, the Pandemic emergency purchase programme (PEPP) and Targeted longer-term refinancing operations (TLTROs)
ON the PEPP – they increased the size of the envelope by 500bn and extended the period of net purchases by 9 months to March 2022.
This program will likely remain primarily focused on government purchases, so should remain supportive for government spreads, particularly in the periphery. The ECB will also remain active in corporate bond markets which again should help keep the cost of funding for corporates low. It’s important to remember this program remains flexible and purchases can and will be adjusted as needs arise.
Moving onto TLTROs – here we saw a 12month extension of the current generous conditions until June 2022. Collateral easing rules were extended until the same date. They also moderately increased TLTRO borrowing capacity for banks, from 50% to 55% of TLTRO eligible loans
The extension of the period for which the lower rate applies removes the risk of a sharp tightening in borrowing conditions come the middle of this year. The rate at which banks can secure funding, -1% if sufficient lending criteria are fulfilled, remains very attractive to banks. To the extent that additional capacity exists we should see TLTRO borrowing continue to increase this year.
This in turn, should keep European bank issuance in unsecured money market instruments such as euro commercial paper (ecp) and certificates of deposit (cd’s) subdued this year. As a money fund portfolio manager, I have observed a decline in this issuance or see it priced at increasingly unattractive levels. To a large extent the decline in Euribor levels has captured this trend. If we look at the 3 month tenor this fallen from a peak of -16bps (shortly after the onset of the Pandemic) to its current level of around -55bps. To the extent that Euribor levels are based on actual transactions, we would see limited scope for them to fall much further. We think it unlikely that investors would be willing to lend to banks for term periods at levels much below the Euro Short Term Rate (ESTR- a proxy for where overnight cash may get invested which has averaged -55bps over the last 6 months). The market seems to agree, only pricing Euribor to fall a further 2bps this year.
European money market funds have experienced rising balances through the second half of last year. This is consistent with an ever-increasing amount of excess liquidity in the system, driven by ECB policy. As mentioned, the opportunity to buy European bank money market product has been on the decline. To some extent, for our funds this cash has been diverted towards higher quality paper in government or agency space where issuance volumes have remained relatively healthy. We think this continues with fiscal commitments likely to remain elevated.
We also continue to look for opportunities to source non-euro area banks when the cross-currency terms provides reasonable entry points for Euro denominated paper. We are starting to see this post year-end.
Finally – back to the ECB and what are they unlikely to do this year?
While their forward guidance remains for policy rates to stay at current or lower levels, there has been little indication that the ECB are willing cut the deposit rate from the existing level of -50bps. The fact that they chose not to do this last year, suggests the hurdle is relatively high for another rate cut. While ruling it out makes no sense, the ECB will instead likely push further on their chosen policies of the PEPP and TLTROs if further accommodation is needed. Whether they do so or not will depend on how the pandemic and recovery plays out and in particular how the inflation outlook evolves. The December staff projections for inflation remained uncomfortably low and point towards the ECB needing to do more later this year.
In conclusion, our team believes this point towards rates being lower for longer.
Thank you for your time today. If you have any questions, please reach out to our team or your JP Morgan Asset Management Representative.
Welcome to J.P. Morgan Global Liquidity’s audio commentary. My name is Aidan Shevlin, I’m the Head of the International Global Liquidity Fund Management Team, and today I’ll discuss China’s economic and interest rate developments in the fourth quarter and the outlook for 2021.
Economic data released by China during the quarter was uniformly strong, confirming the recovery had broadened and deepened. Exports remained robust, while effective testing and quarantine measures continued to successfully contain the Covid-19 outbreak during the period, triggering a further rebound in domestic sentiment and spending. This allowed policy makers to switch their focus from stabilizing the economy to supporting the recovery while normalizing fiscal and monetary policy.
Let’s look at these key trends:
GDP continued to recover from its start of year lows, with the third quarter printing at a solid 2.7%q/q pushing the annual pace to 4.9%y/y. Fixed asset investments hit a new year-to-date high of 2.6%y/y, supported by government investment and property demand.
Meanwhile, industrial production remained healthy, rebounding to pre-pandemic levels on robust global demand for electronics, seasonal goods and personal protective equipment. This demand was also reflected in very strong trade data with China continuing to gain market share. Exports jumped to a two and half year high of 21.1%y/y and the trade surplus hit a record high of USD 75.4bn in November.
By quarter end, retail sales - which accounts for a significant part of the economy - witnessed a broad based resurgence. The combination of higher household incomes, improved consumer confidence and a reduction in social distancing requirements all boosted demand for goods and services – with online sales and auto sales particularly strong.
Finally, inflation declined further from its first quarter peak, dropping to a decade low of -0.5%y/y. The fall in prices was aided by a high base effect as food costs normalized, while non-food prices remained muted.
(data source: Bloomberg and J.P. Morgan Asset Management], as of 23 December 2020)
As economic recovery gained momentum, the People’s Bank of China (PBoC) remained mildly hawkish throughout the fourth quarter, with their attention focused on preventing volatility in the shadow banking sector and speculative bubbles in the property sector. The central bank left key monetary policy rates, including the Medium Term Lending Facility and the Loan Prime Rate unchanged throughout the period. Nevertheless, liquidity remained reasonable, with the PBoC utilizing open market operations to ensure funding costs were stable.
Short tenor SHIBOR yields trended upwards during October and November towards year-to-date highs and the curve steepened, before yields declined slightly in December, to end the year moderately lower. The 1-year treasury bill and 1-year policy bank bond also peaked in mid-quarter, before declining ahead of year-end. The 7-day interbank and stock exchange repo rates remained relatively stable, averaging 2.15% and 2.86% respectively, which were higher than in third quarter. The Renminbi continued to appreciate throughout the quarter, hitting a 32-month high of 6.5234 versus the US Dollar in late December.
(data source: Bloomberg and J.P. Morgan Asset Management], as of 23 December 2020)
New loan and aggregate financing data continued to increase during the quarter, primarily due to additional government and corporate borrowing. However, as government support measures faded and interest rates normalized, the challenges faced by highly indebted corporate bond issuers magnified. A number of bond defaults by state owned enterprises in December raised investor concerns, reduced demand for bonds and triggered a spike in credit spreads. Fortunately the regulators intervened, announcing several measures to help calm market sentiment. Whilst onshore corporate bond defaults remain low by western standards, they are likely to increase in the new year.
Meeting in December, the government’s Central Economic Working Conference acknowledged that growth was stabilizing and suggested that future fiscal policy would normalize and be more sustainable. The conference also focused on promoting the government’s key goals of structural reforms, and technological innovation to boost productivity and demand – allowing China to achieve its long term economic objectives.
In conclusion: By the end of the fourth quarter, China’s economic rebound had expanded and extended, confirming predictions that China will be one of the few large economies to post positive growth in 2020.
The successfully containment of the Covid-19 outbreak should allow domestic consumption to accelerate further in 2021 as social mobility restrictions are eased and employment stabilizes. This will help offset slower export growth as seasonal demand fades and increasing lockdowns potentially impact developed market demand.
Fiscal and monetary policy will continue to evolve in 2021 to support the government’s goal of steady, sustainable growth. The PBoC will remain mildly hawkish, balancing elevated interest rates with adequate liquidity to prevent speculative financial activities while minimizing systemic risks. Meanwhile, the government’s fiscal deficit should decline as stimulus measures are reduced and the authorities likely adopt a stricter financial regulations.
Although a number of risks remain, including the fiscal drag of lower government spending, faster financial deleveraging and continued US-China political tensions - the strong economic rebound has increased expectations that China will continue to lead the global recovery in 2021.
Thank you for joining the conversation. Should you have any questions, please reach out to your J.P. Morgan Asset Management representative.
Hi, I’m Olivia Maguire, Sterling Money Market portfolio manager with the J.P. Morgan Asset Management Global Liquidity team in London. Thanks for joining our conversation today where I’m going to discuss the potential for negative rates in the UK.
Back in May 2020, the new Bank of England Governor, Andrew Bailey, first mentioned that negative rates were a tool under active review for the UK Monetary Policy Committee, or the MPC. Before that point the Governor and his predecessor, Mark Carney, had been more supportive of a lower bound that was close to, but above zero. Since those comments from Bailey in May, the market has adjusted to the expectation that Bank Rate in the UK could follow rates in Europe, Japan and Switzerland below zero into negative territory, and that previously cited challenges around communications and difficulties for banks and building societies in dealing with sub-zero rates may now have lessened or, can be overcome. In fact the MPC said in their latest meeting minutes for September that the Bank of England and the Prudential Regulation Authority, (the PRA), will commence “structural engagement on the operational considerations” of negative policy rates in the fourth quarter of 2020. That technical work, to ensure that the financial system can implement sub-zero rates will take time to complete according to Bailey, and the work itself does not actually signal that the Bank will act on reducing rates, however it is the next step to ensure that policy makers are ready for negative rates if needs be, or in the MPC’s own words, “should the outlook for inflation and output warrant it at some point during this period of low equilibrium rates”.
Economic data up to the September MPC meeting had held up better than expected but downside risks to the UK economy do remain; one risk is to employment as the more generous Government support programs, such as furlough schemes, come to an end; a second is the outcome of UK and EU Brexit trade negotiations and a third is the economic impact of further waves of COVID-19 infections in the UK and globally.
Right now, we believe that the MPC’s marginal tool of choice would be to extend Quantitative Easing, and so in the face of any downside risks materialising, they could ease monetary policy by increasing asset purchases from the current envelope of £745billion. Negative rates are firmly in the toolkit, but with the ongoing technical work to ensure the financial system is operationally ready for them, we do not anticipate that the Bank would implement sub-zero rates until at least the second quarter of 2021 or possibly later.
So, what does this outlook mean for our investors? Well since Bank Rate was cut to 10 basis points in March this year, we have seen a correlated fall in gross yields across Sterling Liquidity strategies. As was our approach in other currencies, we do not intend to let mutual fund fees alone be the cause of a fund’s performance becoming negative. So where possible, we will waive fees in order to maintain a fund’s yield at zero or higher and we are already implementing this approach across Sterling Liquidity short-term funds.
If a fund’s gross yield were to approach negative levels, then some changes are required to Sterling Liquidity fund structures to deliver negative net yields, and regulatory frameworks require managers to provide specific prior notification to existing investors ahead of any proposed changes, as was the case with our EUR Liquidity strategies which have been operating ordinarily with negative yields since 2015.
In summary, while negative rates in the UK are now a distinct possibility, they won’t happen until the Bank of England has concluded technical and operational work on their feasibility, and while gross yields on JPMorgan Sterling Liquidity Strategies remain above zero, clients will receive a net yield of zero or higher.
Thanks for listening today & should you have any questions, or wish to discuss the topic further, please do not hesitate to contact your J.P. Morgan Asset Management representative who would be happy to put you in touch with us here on the investment desk.