Fixed Income Update Q2 2021
We are increasingly of the opinion that risky assets will face stiffer headwinds over the next 3-6 months, and that cyclicality is no longer attractively priced. At most, there could be a significant consolidation, and at least a decent correction. The economic cycle itself remains intact, but the problems are bullish sentiment, full valuations and a lack of upside policy surprises, all of which encourage us to be more cautious from here on. This is a tactical call and as such, comes with the usual ‘health warning’: it is usually easier to identify the troughs in markets than the peaks.
In fixed income markets, it’s usually when things begin to ‘feel’ better that you run into maximum optimism. But wouldn’t it be ironic if the long-awaited reopening of economies and societies turned out to be a difficult period for markets? We have been debating for a while now whether 2021 would be a ‘sell in May and go away…’ year.
Hindsight is a wonderful thing: it’s easy to see that pretty much everything was aligned to be bullish on cyclicality in May last year. Sentiment was depressed, valuations were reasonable (especially for cyclical parts of the market), macro surprises were poised to move higher and there was plenty of stimulus (both monetary and, crucially, fiscal) still to come. Fast forward a year and the balance of evidence has shifted in the opposite direction.
Focusing on policy and the macro outlook, strong global growth for 2021 is now an overwhelming consensus. We completely agree, although risks remain, as explored by James Carrick later in this outlook. The question mark is policy. With the new US administration's fiscal package now agreed, policy is probably now ‘as good as it gets’. If anything, as growth rebounds strongly throughout the middle of 2021, it is more likely that policy surprises (at the margin) will be negative. We’ve consistently highlighted that this monetary versus fiscal policy debate is the most important one, and it feels like we’re getting close to the ‘fish or cut bait’ decision.
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