Developed Countries

The 2019 UK General Election result offers four possible medium-term outcomes for UK exposed investments: Conservatives win 340 seats or more: This comfortable majority for the Conservatives is medium-term positive for UK exposed investments, as prime minister Johnson would not be dependent on the 20 or so hard Brexit extremists to pass any free trade deal (FTA) through parliament. Albeit the markets are already pricing the Conservatives to win 337-343 seats. Conservatives win 320-340 seats: This marginal majority for the Conservatives is medium-term risky for UK exposed investments, because the hard Brexit extremists would have disproportionate influence and leverage, keeping open the possibility of a hard Brexit on WTO terms after the standstill transition period ends on December 31 2020.         Conservatives win 310-320 seats: This ‘marginally hung’ parliament is medium-term risky for UK exposed investments, as it is essentially no change from the current gridlocked parliament. Conservatives win less than 310 seats: This ‘comfortably hung’ parliament is medium-term positive for UK exposed investments, as it creates the possibility of the softest (or no) Brexit under a Labour-led minority government. At the same time, a minority government would be unable to pass its most contentious and supposedly ‘market unfriendly’ policies. If the result is 2. the marginal majority, and the market does not appreciate the risk, then it presents a sell opportunity. Conversely, if the result is 4. the comfortably hung parliament, and the market does not appreciate the upside, then it presents a buy opportunity. Fourth Time Lucky For The UK Pollsters? The 2019 UK General Election is the fourth major UK vote since 2015 in which the UK/EU relationship has featured front and centre. The first was the 2015 General Election, in which then prime minister David Cameron promised a referendum on EU membership, subject to the Conservative party winning an outright parliamentary majority, which it duly did. The second was the subsequent 2016 in/out EU referendum in which the UK voted to leave the EU. The third was the 2017 General Election called by prime minister May to bolster her Brexit negotiating position. But May’s plan backfired. She managed to lose the Conservative majority, her party’s Brexit negotiating position, and ultimately her job. So here we are at the fourth major UK vote in little over four years. Significantly, the pollsters got the 2015, 2016, and 2017 UK votes very wrong. In 2015, they predicted a hung parliament; but the actual outcome was a comfortable majority for the Conservatives, forcing Cameron to deliver his promise of an EU referendum. In the ensuing 2016 referendum, the pollsters predicted a narrow win for remain; the actual outcome was a narrow win for leave. Then in 2017, the pollsters predicted a very healthy vote share win for the Conservatives – and the spread betting markets priced the party to win 364-370 seats in the 650 seat UK parliament; but the actual outcome was 317 seats and a hung parliament – because the pollsters had underestimated the Labour vote by five percentage points. Today, just as in 2017, the pollsters are predicting a healthy vote share win and comfortable parliamentary majority for the Conservatives. At the time of writing (election eve) the spread betting markets are pricing the Conservative party to win 337-343 seats. When the election day exit poll comes out at 10pm UK time, we will get a good idea whether it is fourth time lucky for the pollsters. But irrespective of whether they are right or wrong, the immediate market reaction might still offer some medium-term investment opportunities. The Key Numbers… And Where The Immediate Market Reaction Could Be Wrong The Conservatives need a working majority – because having burnt their bridges with the DUP (Northern Ireland unionists), no other party is likely to support prime minister Johnson’s EU withdrawal agreement. Given that the speaker, deputy speakers, and Sinn Fein (Northern Ireland republicans) do not vote in the UK parliament, and depending on the number of seats that Sinn Fein win, the threshold for a working majority will be around 320 seats. This creates four potential outcomes for the markets: Conservatives win 340 seats or more: This comfortable majority for the Conservatives is medium-term positive for UK exposed investments, as Johnson would not be dependent on the 20 or so hard Brexit extremists to pass any free trade deal (FTA) through parliament. But as noted above, the markets are already pricing the Conservatives to win 337-343 seats. Conservatives win 320-340 seats: This marginal majority for the Conservatives is medium-term risky for UK exposed investments, because the hard Brexit extremists would have disproportionate influence and leverage, keeping open the possibility of a hard Brexit on WTO terms after the standstill transition period ends on December 31 2020. Conservatives win 310-320 seats: This ‘marginally hung’ parliament is medium-term risky for UK exposed investments, as it is essentially no change from the current gridlocked parliament. Conservatives win less than 310 seats: This ‘comfortably hung’ parliament is medium-term benign for UK exposed investments, as it creates the possibility of the softest (or no) Brexit under a Labour-led minority government. At the same time, a minority government would be unable to pass its most contentious and supposedly ‘market unfriendly’ policies. Of these four possibilities, if the immediate market reactions to 2. the marginal majority, or 4. the comfortably hung parliament do not appreciate the risk and upside respectively, then they will create sell and buy opportunities for UK exposed investments. What Are The UK Exposed Investments? The most obvious UK exposed investment is the pound, which is still trading at a near 10 percent discount versus the euro and the dollar, based on the pre-referendum relationship with real interest rate differentials (Chart I-1 and Chart I-2). However, the extent to which that discount can narrow depends on how much worse off (if at all) the UK economy finds itself in its new trading relationships with the EU and the rest of the world compared with full membership of the EU. Chart I-1The Pound Is Cheap Versus The Euro Chart I-2The Pound Is Cheap Versus The Dollar In this regard, the best outcomes are a rapidly negotiated and maximally-aligned FTA with the EU, or the softest (or no) Brexit. Meaning that the aforementioned possibilities 1. or 4. – a comfortable Conservative win or a comfortably hung parliament – are the best outcomes for the UK economy, and therefore for the pound. To the extent that the Bank of England policymakers recognise this, the same conclusion applies to the direction of UK gilt yields, and therefore inversely to UK gilt prices. Turning to the stock market, the FTSE100 is categorically not a UK exposed investment – because it comprises multinationals with minimal exposure to the UK economy. If anything, the FTSE100 is an anti-UK exposed investment. This is because sales and profits are denominated in international currencies, and if these non-pound currencies weaken versus the pound (meaning the pound strengthens) it weighs down the pound-denominated FTSE100 versus other markets (Chart I-3). In fact, the ‘real’ UK stock market is the more UK focussed FTSE250 (Chart I-4), or the FTSE Small Cap index (Chart I-5). Chart I-3When The Pound Strengthens, The FTSE 100 Underperforms Chart I-4The 'Real' UK Stock Market Is The FTSE 250, Not The FTSE 100 Chart I-5Small Caps Are Exposed To The UK Economy In terms of equity sectors, the least exposed to the UK economy are the multinationals with international currency earnings. As well as the obvious oil and gas, resources, and healthcare sectors, it includes the global banks and clothing and apparel (Chart I-6). Chart I-6Clothing Is Not Exposed To The UK Economy The sectors most exposed to the UK economy are the homebuilders (Chart 7), real estate (Chart 8), and general retailers (Chart 9). All of these, plus the FTSE250 and FTSE Small Cap, and of course the pound, can outperform in the medium term in the aforementioned possibilities 1. and 4. – a comfortable win for the Conservatives or a comfortably hung parliament. But they will face pressure in possibilities 2. and 3. – a marginal win for the Conservatives or a marginally hung parliament. Chart I-7Homebuilders Are Exposed To The UK Economy Chart I-8Real Estate Is Exposed To The UK Economy Chart I-9General Retailers Are Exposed To The UK Economy Fractal Trading System* This week's recommended trade is long nickel / short gold, the reverse of the successful trade we recommended on October 3. Back then the nickel price had become technically extended due to scares about an Indonesian export ban. And as predicted, the price subsequently collapsed (by 30 percent) to the point where the price has now become technically depressed. Accordingly, this week's recommendation is long nickel / short gold setting a profit target of 10 percent with a symmetrical stop-loss. The rolling 1-year win ratio stands at 64 percent. When the fractal dimension approaches the lower limit after an investment has been in an established trend it is a potential trigger for a liquidity-triggered trend reversal. Therefore, open a countertrend position. The profit target is a one-third reversal of the preceding 13-week move. Apply a symmetrical stop-loss. Close the position at the profit target or stop-loss. Otherwise close the position after 13 weeks. Use the position size multiple to control risk. The position size will be smaller for more risky positions. * For more details please see the European Investment Strategy Special Report “Fractals, Liquidity & A Trading Model,” dated December 11, 2014, available at eis.bcaresearch.com.   Dhaval Joshi Chief European Investment Strategist dhaval@bcaresearch.com Fractal Trading Model   Cyclical Recommendations Structural Recommendations Trades Closed Trades Asset Performance Currency & Bond Equity Sector Country Equity Indicators Bond Yields Chart II-1Indicators To Watch - Bond Yields Chart II-2Indicators To Watch - Bond Yields Chart II-3Indicators To Watch - Bond Yields Chart II-4Indicators To Watch - Bond Yields   Interest Rate Chart II-5Indicators To Watch - Interest Rate Expectations Chart II-6Indicators To Watch - Interest Rate Expectations Chart II-7Indicators To Watch - Interest Rate Expectations Chart II-8Indicators To Watch - Interest Rate Expectations  

Overweight The handsome year-over-year SPX return will hit a zenith later this month of roughly 35%. However, putting this impressive recovery from last year’s doldrums in perspective is instructive. Tech stocks (including GOOGL and FB) have massively outperformed the SPX (top panel). Within the tech universe, software stocks have in turn trounced the tech sector (top panel). In fact, the SPX return profile excluding tech stocks is eerily similar to the emerging markets that have been global laggards and failed to break out to fresh cycle highs (bottom panel). In other words, returns have been extremely concentrated, and if portfolio managers have missed the software rally, then they have left sizable returns on the table. As a reminder, while we recommend a benchmark allocation on the S&P tech sector, we have been secularly overweight the S&P software index since November 27, 2017, and we are currently up 35 percentage points above and beyond the SPX’s return, since inception. Bottom Line: Stay overweight the S&P software index, but maintain the trailing stop at the 27% return mark since inception. The ticker symbols for the stocks in this index are: BLBG – S5SOFT: MSFT, ADBE, CRM, ORCL, INTU, NOW, ADSK, ANSS, SNPS, CDNS, NLOK, FTNT, CTXS.  

Our sister BCA Geopolitical Strategy Service has introduced a Presidential Election Model that uses political and economic variables to predict the Electoral College vote on the state-by-state level. The model would have predicted the past five elections correctly on an out-of-sample basis, and even the controversial win of George W. Bush over Al Gore in 2000. As of the latest available data, the model predicts that the Republicans will lose Michigan and Wisconsin (critical victories in 2016). Wisconsin, Pennsylvania, and New Hampshire become borderline or “toss-up” states: the probability of a Republican win in these states is 48.77%, 50.17%, and 46.90%, respectively. Even the smallest change in our model inputs can shift these states to either party. According to the model, President Trump is also at the lowest level of approval and weakest state-by-state economy that he can afford. If one of these factors stabilizes below today’s level, Trump will lose his reelection bid. Bottom Line: Quantitative modeling, entirely independent of our qualitative assessment, suggests that Trump is favored to win the 2020 election. However, he is skating on very thin ice with regard to key cyclical variables such as state-level economic performance and popular approval rating.

Highlights Global growth will rebound in 2020, led by the US and China, putting upward pressure on global bond yields. Maintain below-benchmark overall duration exposure. Central banks will stay dovish until policy reflation has clearly turned into inflation, limiting how high bond yields can climb in 2020 but sowing the seeds for a far more bond-bearish backdrop in 2021. Expect mild bear-steepening pressure on global yield curves, led by rising inflation expectations. Accommodative monetary policy and faster growth will delay the peak in the aging global credit cycle. Stay overweight global corporate debt versus sovereign bonds. Returns on global fixed income will be far lower in 2020 than in 2019, given rich valuation starting points. Country and sector selection will be more important in driving fixed income outperformance. For sovereign bonds, favor countries where yields are less sensitive to change in overall global yields; for credit, favor sectors with lower interest rate durations and lower spread volatility. Feature BCA Research’s Outlook 2020 report, outlining the main investment themes for next year from the collective mind of our strategists, was sent to all clients in late November.1 In this report, we discuss the broad implications of those themes for the direction of global fixed income markets in 2020. In a follow-up report to be published in the first week of the new year, we will translate those themes into specific recommended allocations and weightings within our model bond portfolio framework. A Summary Of The 2020 Outlook Chart 1Expect A Cyclical Rise In Global Yields In 2020 The main conclusions from the Outlook 2020 report were cyclically bullish looking out over the next twelve months, but more cautious beyond that. The downturn in global growth seen in 2019 is projected to end in response to several headwinds that have become tailwinds: a small wave of Chinese stimulus and reflation; more stimulative global monetary policies; the substantial easing of global financial conditions as risk assets have rallied worldwide; a fading drag on global manufacturing from inventory destocking; both China (weak growth) and the US (the 2020 US election) have good reasons to de-escalate the trade war in 2020. This backdrop should push global bond yields moderately higher in 2020, while maintaining a backdrop that is once again favorable for risk assets on a relative basis versus government debt (Chart 1). A critical element to this story is the supportive monetary policy backdrop. Central banks worldwide, led by interest rate cuts from the US Federal Reserve and a resumption of asset purchases from the European Central Bank (ECB), are now running more stimulative policies in response to this year’s global manufacturing slump and elevated level of political uncertainty. Policymakers will maintain accommodative monetary policy through 2020 to try and bring depressed inflation expectations back up to central bank targets. This will create a “sweet spot” for global risk assets, with improving economic growth and accommodative monetary policy. A repeat of the spectacular total return numbers seen across the majority of asset classes in 2019 is unlikely, but global equity and credit markets should solidly outperform government bonds. Yet all that monetary stimulus does not come without a price. Policymakers will maintain accommodative monetary policy through 2020 to try and bring depressed inflation expectations back up to central bank targets. This will create a “sweet spot” for global risk assets, with improving economic growth and accommodative monetary policy.  A revival of inflationary pressures in 2021 will force central banks to raise rates much more aggressively. Combined with a China that remains wary of promoting excess leverage, this will drive the current prolonged global business cycle expansion to its recessionary endgame, taking equity and credit markets down with it. This will eventually trigger a new decline in global bond yields as policymakers shift back to easing mode, but from much higher levels than today. Our Four Main Key Views For Global Fixed Income Markets In 2020 The following are the main implications for global fixed income investment strategy based off the conclusions from the 2020 BCA Outlook: Key View #1: Maintain below-benchmark overall duration exposure. The pickup in global growth that we expect in 2020 has its roots in two locations: China and the US. For China, policymakers are keenly aware that the current growth slowdown cannot continue, as it has already pushed nominal GDP growth below 8% (Chart 2). For an economy as highly leveraged as China, slowing nominal growth is lethal and must be avoided to prevent a surge in private sector defaults and rising unemployment. Already, China has delivered significant policy stimulus in 2019: the reserve requirement ratio has been cut by 400bps; taxes have been cut by 2.8% of GDP; capital spending at state-owned enterprises has increased; the currency has depreciated; and, more recently, monetary policy has been eased via traditional interest rate cuts. These measures have eased our index of Chinese monetary conditions and triggered a surge in the China credit impulse, which leads Chinese import growth (i.e. China’s most direct impact on the global economy) by nine months. There are signs that Chinese growth is already bottoming out, as evidenced by the recent pickup in the China manufacturing PMI. Expect more signs of improvement in the first half of 2020. The BCA global leading economic indicator (LEI) has been rising since January of this year, and the global LEI diffusion index is signaling that the upturn will continue in 2020 (Chart 3). With global financial conditions at highly stimulative levels thanks to the robust performance of risk assets in 2019, the backdrop is already conducive to faster global growth. BCA’s geopolitical strategists are of the view that a “détente” in the US-China trade war is still the most likely base case scenario, which would go a long way in reducing the growth-inhibiting effects of elevated uncertainty (bottom panel). Chart 2A Boost To Global Growth From China In 2020 Chart 3Lower Uncertainty + Easy Financial Conditions = Faster Growth As for the US, the lagged impact of the Fed’s 75bps of rate cuts this year has boosted domestic liquidity conditions in a pro-growth fashion. The BCA US Financial Liquidity Indicator, which leads not only US growth but also leads the BCA global LEI and commodity prices by 18 months, is already signaling that US economic momentum is set to bottom out in early 2020 (Chart 4). This signal is in addition to the leading properties of US financial conditions (middle panel), which suggests a reacceleration of real GDP growth back above trend is about to unfold. Chinese policy reflation has typically been a good leading indicator for US capex and is heralding a rebound in investment spending (bottom panel). The pickup in global growth would also help revive the dormant euro zone economy, which has been hit hard though plunging export demand and overall weakness in the manufacturing sector. The entire slump in euro area real GDP growth since the start of 2018 can be attributed to plunging net exports, while domestic demand has held steady (Chart 5). The increase in the China credit impulse and our global LEI diffusion index – both leading indicators of euro area export growth – are signaling that euro area export demand is already in the process of bottoming out (bottom two panels) and should gain momentum in the first half of 2020. Chart 4US Growth Is Poised To Accelerate Chart 5The Drag On European Growth From Trade Will Soon End This better growth backdrop will put moderate upward pressure on global bond yields in 2020. This better growth backdrop will put moderate upward pressure on global bond yields in 2020. Key View #2: Expect mild bear-steepening pressure on global yield curves, led by rising inflation expectations. While we expect bond yields to drift higher in the next 6-12 months, the upside will be capped with central banks likely to stay dovish until policy reflation has clearly turned into higher inflation. Interest rate markets will not begin to price in expectations of tighter monetary policy without evidence of actual inflation picking up. The Fed, ECB, Bank of Japan and other central banks have all stated publicly that they will maintain current accommodative policy settings until realized inflation has sustainably returned to target levels, typically around 2%. This would be a major change in the modus operandi of these policymakers, who have typically signaled rate hikes based simply on forecasts of higher inflation. The implication is that interest rate markets will not begin to price in expectations of tighter monetary policy without evidence of actual inflation picking up (Chart 6). Chart 6Central Banks Will Stay Dovish Until Inflation Sustainably Accelerates A critical ingredient for global inflation to begin moving higher again is a softer US dollar (USD). The year-over-year growth rate of the trade-weighted USD is correlated to global export price inflation and commodity price inflation, more generally (Chart 7). The typical drivers of the USD are all pointing in a more bearish direction: Chart 7The USD Is Critical For Global Reflation Chart 8Global Real Yields & Inflation Expectations Will Drift Higher In 2020 the Fed has cut interest rates multiple times since the summer and is expanding its balance sheet via repo operations and treasury bill purchases; global (non-US) growth is bottoming out, and capital tends to flow out of the USD into more cyclical currencies in Europe and EM when global growth is accelerating; elevated policy uncertainty, which tends to attract inflows into the safety of the USD, is starting to diminish. The combination of improving global growth and a softer USD would normally be enough to generate a significant increase in global bond yields. Yet we do not expect the sort of move higher in the real component of bond yields signaled by our global LEI diffusion index in 2020 (Chart 8, top panel). While real yields should move higher alongside faster growth, if there is no expected tightening of monetary policy as well, the move in real yields will be more limited. The grind higher in global bond yields that we expect in 2020 will come first through faster inflation expectations and, much later in the year, higher real bond yields when central bankers (starting with the Fed) begin to signal a need to turn more hawkish. The grind higher in global bond yields that we expect in 2020 will come first through faster inflation expectations and, much later in the year, higher real bond yields when central bankers (starting with the Fed) begin to signal a need to turn more hawkish. This suggests that inflation-linked bonds should perform reasonably well in countries where inflation is likely to accelerate the fastest, like the US. Faster inflation expectations will also result in some bear-steepening of global government bond yield curves in the first half of 2020 (Chart 9). There is very little curve steepening discounted in bond forward rates in the developed markets – a consequence of the general flatness of yield curves – which suggests that yield curve steepening trades could prove to be profitable in 2020. Chart 9Expect A Mild Bear-Steepening Of Global Yield Curves Chart 10The Fed Has Dis-Inverted The Treasury Curve In the case of the US, the Fed’s recent easing actions have pushed short-term interest rates below longer-term Treasury yields, removing the yield curve inversion that sparked recession fears among investors during the summer of 2019 (Chart 10). With the Fed likely to sit on its hands for most of next year, even as US growth and inflation are likely to improve, this will put additional bear-steepening pressure on the US Treasury curve. In Europe, bond markets have already discounted a very significant impact from the ECB restarting its Asset Purchase Program, which only began last month. Investment grade corporate bond spreads, as well as Italy-Germany government bond spreads, have narrowed substantially despite a weak euro area economy (Chart 11, bottom panel). Meanwhile, the term premium on 10-year German bunds is back to the deeply negative levels middle panel) seen when the ECB was expanding its balance sheet at a 30-40% pace, rather than the 5% pace implied by the current announced pace of purchases of 20 billion euros per month (top panel). This potentially leaves longer-term European yields exposed to the same bear-steepening pressures seen in other bond markets, even within the context of a renewed ECB bond-buying program. Chart 11European Bonds Already Discount A Very Dovish ECB Chart 12The Wild Card For Bonds Markets In 2020: Fiscal Policy A potentially big wild card for global bond markets next year will be fiscal policy, which can also exacerbate yield curve steepening pressures. Any sign of a push toward more government spending, particularly in Europe where there has been such reluctance to open the fiscal taps, would result in a sharper upward move in global bond yields than we are expecting. This is not because of a supply effect related to more government bond issuance that would require higher yields to attract buyers. It is because fiscal stimulus (Chart 12) would push growth to an even faster pace that would bring forward the date when inflation returns to policymaker targets and tighter monetary policy could commence. This would follow a similar path to the curve steepening dynamics described earlier, with a fiscal boost to growth pushing up longer-term inflation expectations before starting to push up short-term interest rate expectations. Key View #3: Stay overweight global corporate debt versus sovereign bonds. Investors should expect another year of corporate bond outperformance versus sovereign debt in the developed economies. The combination of faster global growth, somewhat higher inflation and accommodative monetary policies laid out in the BCA Outlook 2020 report will delay the peak in the aging global credit cycle. This means investors should expect another year of corporate bond outperformance versus sovereign debt in the developed economies. Low borrowing rates are already helping to extend the credit cycle by making it easier for highly indebted borrowers to service their debts. This can be seen in the US, where interest coverage ratios (using top-down data for the non-financial corporate sector) remain above the levels that have preceded previous recessions (Chart 13). Low borrowing rates are also helping indebted borrowers in Europe, particularly in Italy and Spain where the banking system is now far less exposed to non-performing loans than during the peak years of the 2011-12 European Debt Crisis (Chart 14). Chart 13Low Rates Helping Extend The US Credit Cycle Chart 14Low Rates Helping Ease Stress In European Banks Declining Non-Performing Loans Are A Positive For The European Periphery Chart 15A Cyclically Positive Backdrop For Global Corporates According to our checklist of indicators to watch for an end of the corporate credit cycle in the US – tight monetary policy, deteriorating corporate sector financial health, and tightening bank lending standards – only corporate financial health is flashing a warning signal according to our Corporate Health Monitor as we discussed in a recent report.2 In fact, our global Corporate Health Monitor is rolling over – a trend that should continue as growth improves in 2020 – which should support global corporate bond outperformance versus government debt next year (Chart 15). Key View #4: Returns on global fixed income will be far lower in 2020 than in 2019. Country and sector selection will be more important in driving fixed income outperformance in 2020. The start of 2020 looks far different in terms of fixed income valuations compared to the beginning of 2019. For example, the 10yr US Treasury yield started the year at 2.72% and is now 1.83%, while the 10yr German bund yield started this year at 0.24% and is now MINUS-0.31%. These lower yields reflect the slower pace of global economic growth and monetary policy easing delivered by the Fed and ECB. Yet at the same time, corporate credit spreads have narrowed in both the US (the high-yield index OAS is down from 526bps to 360bps) and the euro area (the investment grade index OAS is down from 152bps to 100bps). These massive rallies in global bond markets this year resulted in both lower government bond yields and tighter credit spreads - even with slower global growth that would normally be a trigger for wider spreads/higher risk premiums. Looking at the current valuation of government bond yields in the major developed markets from a long-run perspective, it is difficult to make the case that it is attractive. Medium-term real bond yields remain well below potential GDP growth rates, a consequence of central banks keeping policy rates well below neutral levels suggested by measures like the Taylor Rule (Chart 16). Chart 16Global Government Bonds Are Expensive Without the initial starting point of cheap valuations, fixed income return expectations for 2020 should be tempered. This means that rather than loading up on maximum duration risk and/or credit risk to capture big yield and spread moves, bond investors should be more selective in country, maturity and credit exposure to generate outperformance in 2020. Chart 17Favor Lower-Beta Government Bond Markets In 2020 For government bonds, that means focusing country exposures on lower-beta markets where yields are less correlated to moves in the overall level of global bond yields. Our preferred way to measure this is to look at the beta of monthly yield changes for the benchmark 10-year government yields of the major developed market countries to the overall Bloomberg Barclays Global Treasury index yield for the 7-10 year maturity bucket, over a rolling three-year window. We define a “high-beta” bond market as having a yield beta of 1.25 or higher, and a “low-beta” bond market as having a yield beta of 0.75 or lower. Under that definition, global bond investors should underweight higher-beta Canada, the US and Italy, and overweight low-beta Japan and Spain (Chart 17). Bond markets with betas between 1.25 and 0.75 (Germany, Australia, Sweden, the UK) can also be considered on their own fundamental merits. Of that list, we see Germany and Australia having a better chance of outperforming the UK and Sweden, given the greater odds that the Bank of England or Riksbank could signal a need to hike rates in 2020 compared to the ECB or Reserve Bank of Australia. Chart 18Stay Overweight Global Spread Product In 2020, But Be Selective For spread product, that means focusing exposure on sectors that are less risky, either defined by interest rate duration or spread volatility (i.e. spread duration). With credit spreads remaining near the low end of long-run historical ranges for nearly all major markets (Chart 18), it is hard to find examples of spread product being cheap in absolute terms. On a risk-adjusted basis, however, negatively-convex spread product like US and euro area high-yield debt and US agency MBS actually look more interesting in the rising yield environment we expect in 2020, since the interest rate durations of those fixed income sectors fell as bond yields declined in 2019. Thus, we recommend owning high-yield corporates over higher-duration investment grade corporates in the US and euro area, while also favoring US agency MBS over higher-quality credit tiers of US investment grade corporate credit.   Robert Robis, CFA Chief Fixed Income Strategist rrobis@bcaresearch.com Footnotes 1 Please see The Bank Credit Analyst, “Outlook 2020: Heading Into The End Game”, dated November 22, 2019, available at bca.bcaresearch.com. 2 Please see BCA Research Global Fixed Income Strategy Weekly Report, “The Lowdown On Low-Rated High-Yield”, dated November 27, 2019, available at gfis.bcaresearch.com. Recommendations The GFIS Recommended Portfolio Vs. The Custom Benchmark Index Duration Regional Allocation Spread Product Tactical Trades Yields & Returns Global Bond Yields Historical Returns