b) Explain the type of monetary policy used by central banks to overcome global recession. Question 1Bonds Remain Relevant Amid Uncertain TimesAs the number of reported Covid-19 cases worldwide breaches the 26 million mark and deaths totalclose to 900,000, the trade-off between economic cost and reducing the spread of the pandemic throughlockdowns is starting to weigh on global growth. The number of cases in the US alone representedalmost 25% of the total worldwide, while Brazil and India each made up about 15%.The outbreak has pushed most economies into a prolonged global recession despite the unprecedentedscale of fiscal and monetary policy measures being unleashed. To date, the US Federal Reserve haslowered its Fed funds rate by 150 basis points (bps) this year to near zero, launched extensivequantitative easing (QE) and bought individual corporate bonds of investment and high-yield grade forthe very first time in its history. The combined amount of QE by central banks globally so far is in thetrillions, far exceeding the amount spent during the 2008 global financial crisis. These measures areneeded to ensure credit intermediation and liquidity remain ample so as to avoid a total collapse of theglobal economy.Since the sell-off in March 2020, fixed-income returns across developed, emerging and high-yieldmarkets have recovered somewhat and even surpassed the pre-pandemic levels for selected fixed-income categories. In Asia, Asian USD credits have performed remarkably well and we remainconstructive on them, given the yield pickup versus the other developed-market bonds. Within emergingmarkets (EMs), we feel that Asia ranks as a “good EM" in terms of strong underlying fundamentalsversus other EM peers and there is potential for growth. Furthermore, the investor base has been steadilygrowing, as evidenced by the inclusion of more Asian bonds into the relevant indices, which are trackedby global investors. Nevertheless, within the broad spectrum of Asian credit bonds, the portfoliomanagement and credit research analysts’ teams strongly emphasise fundamental credit selection afterhaving filtered bonds using top-down macro, relative value analysis and diversification strategies.Allocation between Asian credits and US equities, Asian equities and global bonds exhibitedhistorically low correlation, making Asian credits an ideal asset class for portfolio diversification andyield.Malaysian bonds were the star performers in emerging Asia over the second quarter of 2020. WhileGDP numbers for the second quarter were disappointing at -17.1% year on year, the Malaysian bondmarket has outperformed. This quarter, the Malaysian government bond market has been a boon tooffshore investors, having returned more than 5% in USD terms. Their returns far outpace those of othercountries such as the Philippines and South Korea, which were also the darlings of offshore investors.Global funds have been investing in the Malaysian government bond market despite a very weak 2QGDP show. Net foreign inflows totalled US$4 billion (RM16.65 billion) from May to July 2020, whichcomes close to erasing the cumulative outflow of US$4.7 billion in the previous three months at thepeak of the March sell-off globally, led by the Covid-19 outbreak. One of the key attractions foroverseas investors is Malaysia's relatively high “real yields", which have been bumped up by a five-month bout of deflation (with the latest July Consumer Price Index registering -1.30%). With this, thereal yield of Malaysia's 10-year government bonds, currently at a nominal yield of 2.50%, translatesinto +3.80%. In addition, the Malaysian bond market has over the years been renowned for itsestablished backstop and market resilience, as proven by this year's March global bond marketmeltdown. Question 1 (Continued)Going forward, the different stages of outbreak around the globe mean external demand may remain aconsiderable drag on economic growth until most countries are completely out of their respective self-imposed lockdowns. Increasing political risks ahead of the US presidential election and the heightenedUS-China geopolitical tensions remain wildcards with global markets continuing to see volatility. Interms of the presidential election, while it is still too early to make a call on it, the current marketconsensus is that a Democrat victory in November will be generally negative for US equities, and isexpected to lead to lower 10-year US Treasury yields and a weaker US dollar. This is due to Joe Biden'sstance on corporate tax, where the intention is to increase it to 28% from the current 21%. A Democratsweep suggests that Biden would ease the geopolitical tensions with China, but not fundamentally alterthe US' current stance with the world's second largest economy.In conclusion, given these political uncertainties and a pandemic that is far from over, bonds remainrelevant and will continue to play a role in any investment decision. Based on an individual's riskappetite, RHB offers a variety of bond fund strategies. Funds that invest in Malaysian bonds, sukuks,EM bonds, China bonds, US bonds, Asian high yields and US high yields offer different returns andrisk characteristics. Pertinent questions for investors include where they want to invest, how much riskthey are willing to take, which geographical location and the duration of their intended investments,given that bonds have maturities. Answering these questions will help investors select funds that willsuit them in view of the fact that policy interest rates, including fixed deposit rates, will continue to below for a longer period of time. -Source: Adapted and modified from The Edge Markets, 21* September 2020, Bonds Remain RelevantAmidUncertainTimes, 'viewed20thJanuary2021,availableaton

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b) Explain the type of monetary policy used by central banks to overcome global recession.

ENGR.ECONOMIC ANALYSIS

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Chapter1: Making Economics Decisions

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