28 January 2021
As we take stock of the first few weeks of 2021, we note that some trades haven’t played out as expected. Risk assets have stalled somewhat as they look for a catalyst to take them another leg higher.
With much of the economic recovery dependent on the success of the vaccine rollout, early evidence from Israel suggesting that vaccination significantly reduces infections is positive. However, there are concerns, with Moderna announcing that its vaccine—while effective against the South African variant of the virus—does not work as well as it does against other variants. Vaccine supply problems, meanwhile, have slowed expectations for a pick-up in activity in Europe. Markets have also digested recent less dovish central bank announcements. Following the Bank of Japan’s continued attempts to modestly steepen the Japanese yield curve, the European Central Bank emphasised that its pandemic emerging purchase programme does not need to be used in full if financial conditions remain favourable, while the Bank of Canada has signalled an openness to tapering. At the same time, purchasing managers’ indices have confirmed the slowdown in most developed market economies in January amid another round of lockdowns, although the US has remained the exception. Despite concerns for the outlook, the International Monetary Fund’s updated World Economic Outlook projects 5.5% global growth in 2021, which is 0.3 percentage points higher than its previous forecast. This upward revision reflects the expected positive impact of the vaccine and additional policy support, such as the $1.9 trillion fiscal stimulus package that President Biden has proposed in the US.
Despite a commonly held view at the beginning of the year that the backdrop was supportive for risk assets, some fixed income markets have so far failed to produce the returns that might have been expected. For example, one of the top ideas from our December Investment Quarterly meeting – emerging market debt – has struggled, with hard currency sovereigns posting negative returns year to date. Some of the expected returns appear to have been brought forward to the end of 2020, while the market also seems to be awaiting a catalyst to drive risk assets higher.
Year-to-date returns for risk assets have underwhelmed compared to December 2020
Demand for credit has been strong as investors hunt for yield. US investment grade funds have recorded inflows every month since March 2020, amounting to $165 billion. However, inflows in January have moderated to $9.2 billion, down from an average monthly figure of $13.3 billion in the fourth quarter. January’s inflows were also below elevated levels of supply, which has been boosted by issuers continuing to take advantage of favourable financing conditions to shore up cheap capital. US investment grade corporates have already issued debt worth more than $110 billion in January. All told, we are starting to see a bit of indigestion. (All data as of 26 January 2021.)
What does this mean for fixed income investors?
Given some of this year’s expected performance was pulled forward to the tail end of last year, it was perhaps inevitable that risk assets would struggle to maintain their upwards march. Some recent developments have also provided headwinds, including stronger supply, less dovish central bank rhetoric, and new waves and variants of the virus. However, we believe that demand for risk assets will prevail in the end. Central bank rhetoric represents an incremental shift to policy rather than a sea change, while economic activity would be expected to pick up as lockdown measures ease—particularly in the event that vaccine rollouts follow the path of Israel’s success so far. Overall, we remain positive on risk assets and believe there is more room to run.
About the Bond Bulletin
Each week J.P. Morgan Asset Management's Global Fixed Income, Currency and Commodities group reviews key issues for bond investors through the lens of its common Fundamental, Quantitative Valuation and Technical (FQT) research framework.
Our common research language based on Fundamental, Quantitative Valuation and Technical analysis provides a framework for comparing research across fixed income sectors and allows for the global integration of investment ideas.
Fundamental factors include macroeconomic data (such as growth and inflation) as well as corporate health figures (such as default rates, earnings and leverage metrics)
Quantitative valuations is a measure of the extent to which a sector or security is rich or cheap (on both an absolute basis as well as versus history and relative to other sectors)
Technical factors are primarily supply and demand dynamics (issuance and flows), as well as investor positioning and momentum