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October 14, 2020 | GSAM Connect

The Recovery Line

This summer was meant to commemorate the opening of the Olympics in Tokyo, but instead marked the reopening of economies globally. The policy backdrop remains supportive and we remain overweight fixed income sectors in the path of central bank buying.

The Economy: Moving Towards the Recovery Line

  • Global growth sprinted back in the third quarter but remains below its pre-COVID-19 level. In other words, it is not yet over the recovery line. The recovery will remain incomplete until services sector activity normalizes.
  • High unemployment and negative output gaps suggest inflation will remain subdued. The pandemic has fast-tracked trends from telemedicine to e-commerce and remote working to automation that will influence the make-up of the global economy and its workforce as well as inflation dynamics. There are potential drivers of higher inflation outcomes in the years ahead but as recently discussed, we are not there yet.

Policy: Changing the Game

  • Several new economic policies made their debut at central banks and governments globally in 2020, from corporate bond buying by the US Federal Reserve (Fed) to government subsidies for short-term work in the UK.
  • The Fed also announced a new average inflation targeting framework—which cements its dovish policy stance—and evolved how it will assess labor market performance, taking into consideration racial and income disparities. We think this evolution in policymaking, with greater regard for social issues, will extend beyond the US.
  • With central banks on “easy policy autopilot”, we expect fiscal policy to be a key driver of changes in the macro and market outlook going forward. The cyclical environment and low rates support the case for additional fiscal spending.

Fixed Income Views

  • Among G10 rates, we favor cross-market or curve shape views. For example, we are overweight higher and steeper yield curves in Australia relative to the low and flat European yield curve.
  • We remain overweight Agency MBS and corporate credit on both sides of the Atlantic given the supportive policy backdrop. We believe the Fed has ample room to respond to market dislocations and keep left tail risks in check.
  • As markets have progressed from a “search for liquidity” to a “search for yield”, we also see value in adding exposure to high yield corporate credit.
  • Within corporate credit, we are also selectively overweight issuers that are perceived to be severely or modestly exposed to COVID-19 developments given attractive risk-adjusted return potential.
  • We are broadly neutral on EM assets which we believe require a healthier pace of global growth to perform.


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