2021: A more upbeat view on global fixed income

Key takeaways
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The global economy has experienced an unusual recession - one induced by public policy following a health crisis, rather than an economically driven one.
The recession took hold rapidly as people were asked to stay home to limit the spread of the coronavirus and allow time for the medical sector to deal with a pandemic that caught the world unprepared.
As the fight to bring the outbreak under control continues, the exit from recession has been rapid. Compared to our expectations at the peak of the crisis, the economic contraction has proved to be shallower than we expected and the recovery faster.
While we have seen a recent upsurge in infection case numbers, positive indications of a step towards a vaccine rollout have reignited hope for a positive pandemic outcome. We have upgraded our growth forecasts for the US and eurozone and an uptick in industrial production across emerging economies has given us a slightly more upbeat outlook on 2021 and the implications for fixed income markets.
Recent growth outcomes in the US and Europe have beat expectations for a number of reasons. First, the opening of the US and eurozone economies has been more rapid than anticipated. Most countries were able to resume much of their economic activity without major second waves of the virus. In regions that experienced renewed outbreaks, such as the US South and West, the spread of the virus was limited without full lockdowns. Instead, targeted business closures, mask wearing and social distancing have been effective.
Second, some sectors are less exposed to the virus, such as construction and manufacturing, where production and sales are recovering sharply. Other sectors where face-to-face interaction is essential still face challenges and will likely not fully normalize until a vaccine becomes available. Clearly, there has been a loss of jobs and incomes in these sectors, but policy support has helped.
Third, policy support has been quick, very large, and effective. During the global financial crisis, new monetary policies, such as quantitative easing (QE) and forward guidance, had not been tried or tested and were consequently deployed gradually and timidly.
In Europe, QE was not launched until 2015. This time, however, central banks announced monetary stimulus in the form of forward guidance and QE programs immediately after the coronavirus shock. On the fiscal side, governments have offered an unprecedented amount of income support and loan guarantees, providing a cushion for business and consumer spending.
These policies have been arguably effective. In a typical recession, debt levels tend to be high, creating a need for deleveraging in the early stages of a recovery that tends to hamper the effectiveness of monetary policy.
This recession, however, has not been triggered by economic reasons and the private sector still has the ability to borrow. Therefore, we believe monetary policy can be more effective in the current environment. In the US, high levels of activity in the housing sector and mortgage applications is one sign of this. In the eurozone, European Central Bank lending surveys have suggested that, despite some signs of tighter conditions, the credit channel has remained open in the region.
Meanwhile, infection rates in emerging market (EM) economies are declining but remain uncomfortably high for several EMs, and concerns of a second wave, especially in Europe, are making headlines. Nevertheless, we think the worst is over and EM economies are on the path to recovery. First and foremost, the global cycle is entering a “goldilocks” phase. Global recovery from the Covid-19 shock will likely support external demand, including for commodities that are essential for several EMs.
Inflation in advanced economies is expected to remain below targets, allowing G3 central banks to maintain their unprecedented accommodative stance for an extended period. We think this global backdrop is supportive for risk and EM assets in general, especially once US political uncertainty is in the rear-view mirror and additional fiscal support arrives, which we think will keep the US dollar subdued for longer.
In addition, we expect a viable vaccine to become available sometime in 2021, which would likely boost sentiment and recharge the global recovery. Industrial production has led EM recovery. With full lockdowns seemingly behind us, all EM economies are on a path to recovery, although with varying speeds across regions, countries and sectors.
The speed of recovery across regions and individual countries reflects many factors, mainly the differentiated timeline of lockdowns and speed of re-openings as well as the extent of policy support. However, in all EMs, industrial production has led the recovery, after physical restrictions on activity were lifted in Q2.
As production has begun to normalize, we have also seen global trade and EM exports pick up and Purchasing Managers’ Index Manufacturing New Orders are now in expansionary territory, pointing to further recovery ahead. Services and private consumption have lagged production, scarred by a sharp decline in employment and continued disruption to activity in many service subsectors, including tourism, which is a significant contributor to growth and employment in several EMs.
Taken collectively, our view of the near term outlook for both developed and emerging economies – and consequently fixed income markets, and has taken a more sanguine turn. While we acknowledge that the successful rollout of a Covid vaccine remains pivotal, the continued support of central bank policy easing will equally prove crucial to the health and success of the market in 2021.
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Where individuals or the business have expressed opinions, they are based on current market conditions, they may differ from those of other investment professionals and are subject to change without notice.
Important information
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Where individuals or the business have expressed opinions, they are based on current market conditions, they may differ from those of other investment professionals and are subject to change without notice.
This document is marketing material and is not intended as a recommendation to invest in any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication. The information provided is for illustrative purposes only, it should not be relied upon as recommendations to buy or sell securities.