Weekly Bond Bulletin

2 May 2019

Picking up China

Despite the recent resurgence of growth worries, we maintain the view we expressed in February that Chinese growth will accelerate this year. This should be supportive for fixed income risk assets, especially if higher growth feeds through to other regions.

Fundamentals

China’s easing measures resulted in a pickup in data over Q1, with improvements in purchasing managers’ indices (PMIs), GDP and industrial production in March, along with an increase in the credit impulse, going some way to restoring optimism in markets. However, the subsequent retracement of the manufacturing PMI, from 50.5 in March to 50.1 in April, has prompted questions about whether the anticipated growth pickup will in fact materialise. There are some important factors to consider here. First, although lower, the PMI remains above 50—in expansionary territory. Second, despite the drop at headline level, key components such as new export orders actually improved. Finally, seasonality plays a role, as April readings have historically dropped after the Chinese New Year period. We therefore do not see the most recent data as such a concern, especially given that the policy measures enacted tend to take time to translate to higher growth. Recent data is consistent with the expectation we have held all year for Chinese growth of around 6.3% in 2019, albeit with a lag following policy stimulus. The question is whether higher growth in China will extend to other regions—Europe, for example. If it does, there is likely to be a further lag before data in those regions picks up meaningfully.

Growth in other regions typically lags growth in China—can we expect a pickup?

Source: J.P. Morgan Asset Management; data as of 30 April 2019.

Quantitative valuations

As fears around Chinese growth have started to subside, market sentiment has been strong, with emerging market (EM) indices doing well. US dollar-denominated sovereign debt has returned over 7% year to date (YTD) and corporates are up almost 6%. Continued improvement in China should support risk assets, and, in particular, could play a key role in boosting the laggard so far: EM currencies. FX weakness in 2019 has kept local bond returns relatively subdued, with the currency component of the EM local government bond index flat YTD and down almost 4% since the end of January. Should strength in the Chinese economy feed through as expected to other emerging markets, EM currencies should prove key beneficiaries—especially given that further US dollar strength now looks limited, with US rates likely to be rangebound this year following recent dovish action by the Federal Reserve. (All data as at 30 April.)

Technicals

EM currency positioning appears light: our proprietary survey indicates that investor positioning has decreased to below the 10-year average. Conversely, US dollar positioning has now moved long following a period of strength, so any turnaround could help EM currencies. In terms of demand, positive sentiment is evidenced by the breadth of flows across all fixed income asset classes, with emerging markets no exception (EM aggregate fund flows stand at almost USD 21 billion YTD). An improvement in fundamental conditions, driven by the China growth story, could cause flow momentum to continue for some time yet. (All data as at 30 April.)

What does this mean for fixed income investors?

Investors are right to be cautious at this stage of the economic cycle, and a pickup in China’s growth story is not yet fully confirmed. However, there are reasons not to be too pessimistic about recent data prints, and on balance it’s reasonable to continue to expect a potential feed-through from Chinese policy stimulus to the wider global economy. This should benefit fixed income risk assets overall, and should present opportunities in lagging areas such as EM currencies.

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.

Click here to read more about our FQT capabilities


FOR INSTITUTIONAL / WHOLESALE / PROFESSIONAL CLIENTS AND QUALIFIED INVESTORS ONLY – NOT FOR RETAIL USE OR DISTRIBUTION

The views contained herein are not to be taken as advice or a recommendation to buy or sell any investment in any jurisdiction, nor is it a commitment from J.P. Morgan Asset Management or any of its subsidiaries to participate in any of the transactions mentioned herein. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit and accounting implications and determine, together with their own professional advisers, if any investment mentioned herein is believed to be suitable to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yield are not a reliable indicator of current and future results.

J.P. Morgan Asset Management is the brand for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. To the extent permitted by applicable law, we may record telephone calls and monitor electronic communications to comply with our legal and regulatory obligations and internal policies. Personal data will be collected, stored and processed by J.P. Morgan Asset Management in accordance with our Company’s Privacy Policy. For further information regarding our local privacy policies, please follow the respective links: Australia, EMEA, Hong Kong, Japan, Singapore and Taiwan. This communication is issued by the following entities: in the United Kingdom by JPMorgan Asset Management (UK) Limited, which is authorized and regulated by the Financial Conduct Authority; in other European jurisdictions by JPMorgan Asset Management (Europe) S.à r.l.; in Hong Kong by JF Asset Management Limited, or JPMorgan Funds (Asia) Limited, or JPMorgan Asset Management Real Assets (Asia) Limited; in Singapore by JPMorgan Asset Management (Singapore) Limited (Co. Reg. No. 197601586K), or JPMorgan Asset Management Real Assets (Singapore) Pte Ltd (Co. Reg. No. 201120355E); in Taiwan by JPMorgan Asset Management (Taiwan) Limited; in Japan by JPMorgan Asset Management (Japan) Limited which is a member of the Investment Trusts Association, Japan, the Japan Investment Advisers Association, Type II Financial Instruments Firms Association and the Japan Securities Dealers Association and is regulated by the Financial Services Agency (registration number “Kanto Local Finance Bureau (Financial Instruments Firm) No. 330”); in Australia to wholesale clients only as defined in section 761A and 761G of the Corporations Act 2001 (Cth) by JPMorgan Asset Management (Australia) Limited (ABN 55143832080) (AFSL 376919); in Brazil by Banco J.P. Morgan S.A.; in Canada for institutional clients’ use only by JPMorgan Asset Management (Canada) Inc., and in the United States by JPMorgan Distribution Services Inc. and J.P. Morgan Institutional Investments, Inc., both members of FINRA; and J.P. Morgan Investment Management Inc. Copyright 2019 JPMorgan Chase & Co. All rights reserved.

0903c02a8259e559

2 May 2019
Contributor

GFICC Investors

Building stronger fixed income portfolios for the future

View products