Continental Europe is lagging, and has been slow to approve vaccines and roll out its vaccination programme. The EU recovery fund has been approved but is still at the planning stage and no money has yet been put to work to reconstruct the region’s pandemic-stricken economies. Meanwhile, the route to economic freedom in the UK is progressing well, where more than 15 million people have now received their first coronavirus vaccine shot.

In line with our assessment that US consumers and Asian producers will boost growth, we’ve upgraded our global economic forecasts (and reduced our expectations for Europe slightly). We also believe that government bond yields could increase by slightly more than previously thought. Notably, extra issuance and higher inflation could push up 10-year US Treasury yields to around 1.5% by the end of the year.

As active investment managers, one of our most powerful tools is the ability to adapt to the evolving environment by making tactical asset allocation decisions. This approach involves identifying opportunities that have the potential to deliver attractive returns when considered against the risks involved.

While we believe the general outlook for risky assets is positive, we’re always searching for parts of the market that are largely overlooked by other investors. One area is the Asian high yield bond market, where average yields are 5% higher than those available from US investment grade bonds.

The market is pricing in a default rate of 6% over the next 12 months, and we believe the yields on offer compensate us for this risk. Chinese property developers are the largest issuers of high yield bonds in Asia, and the government is committed to keeping market conditions stable. More generally, the economic outlook for the region remains strong.

While we open an overweight in Asian high yield bonds, we close our overweight in euro high yield bonds. This position has performed well over the past year, with valuations recovering to where they were at the start of 2020. Our analysis suggests the potential for any further returns is slim following this strong period.

The global economy has proved remarkably resilient this year and the pace of growth is likely to bounce back in the second quarter. Yet the speed of the recovery is uneven around the world. We believe the US will be the first developed economy to rebound. Rapid progress with its vaccination programme and President Biden’s fiscal package should combine to boost consumer spending by unleashing significant pent-up savings.

Many Asian countries have managed the pandemic effectively, which has meant they’ve been able to avoid prolonged lockdowns and keep their economies open. Any increase in demand from US consumers bodes well for manufacturers throughout the region, and in particular companies in China. Exports there are already booming and intra-regional trade flows also remain strong.

In order to gain a more timely and accurate view of economic activity in the US and Europe, we’re extracting data from Google keyword searches. For China, we use the Li Keqiang index, which is based on electricity consumption, railway freight and bank loans. The US and Chinese economies appear to be holding up well. Conditions in the UK and euro area are weaker but their economies have been more resilient against the winter pandemic restrictions than last spring.

The coronavirus pandemic has changed our sense of time and disrupted the rhythms of our lives in different ways. Yet there are likely to be many positive longer-term implications – from the productivity gains that have come from adopting new technologies to more flexibility around how we work. What our economy looks like on the other side depends on a number of issues, including how well vaccines work and whether there are enough of them.

The way in which different regions are managing the health crisis is diverging. While the US and UK are progressing rapidly with their vaccination programmes, the EU is lagging and many Asian countries have already bounced back. While in the short term we’re navigating this evolving investment environment, we remain focused on our longer-term responsibilities as investors, which includes our commitment to engage as active owners.

The global economy is bouncing back from the pandemic but some countries are set to make a faster recovery than others

Leaders and laggards

COUNTERPOINT MARCH 2021