The market uncertainties from the COVID-19 outbreak are expected to reinforce the dovish bias for central banks. Already, it’s an environment of low interest rates after central banks globally delivered more than 80 cut rates with around 9,000 basis points of easing¹ in 2019.

In response to the impact of the public health crisis, the Reserve Bank of Australia (RBA) cut its cash rate two times to a record low of 0.25%. The RBA also rolled out a term funding facility of at least A$90 billion to support lending to small and medium-sized businesses. This is part of the government’s economic stimulus packages - totaling A$189 billion - that were rolled out to support Australian workers and business².

Meanwhile, the US Federal Reserve lowered the federal funds rate to a target range of 0%-0.25% via two emergency rate cuts. The Fed also announced unlimited quantitative easing to help restore market liquidity³.

Still, in an ultra-low rate environment, investors can tap the entire global fixed income spectrum for potential attractive return opportunities. In uncertain periods, investors can adopt a defensive approach by shifting towards a quality tilt. And when opportunities arise, there is flexibility to add exposure to higher yielding fixed income assets which offer compelling valuations.
 

Allocating dynamically⁴

In the view of our Global Fixed Income, Currency & Commodities team, a heightened possibility of rate cuts this year, along with expanded central bank asset purchase programmes, should be supportive for government bonds and some high quality corporates.

At the same time, the fallout from COVID-19 could be particularly negative for sectors with highly leveraged companies where cash flow disruptions or delays could be damaging.

Therefore, defensive sector positioning is starting to pay off. We believe sector and credit selection will continue to be a key determinant of future returns.
 

Selection is key

As a hedge against the COVID-19 pandemic, we prefer high-quality duration in markets with relatively higher yields⁵, including the US, Canada and Australia.

In addition, we have been de-risking by increasing protection through credit derivatives and adding exposure to safe haven currencies such as the Japanese yen while removing exposure to emerging market currencies.

There will be a time to re-engage and add risk back into the portfolio. Emerging market debt and higher quality high-yield corporate bonds⁶ are beginning to look alluring at these new yield⁵ levels, though we need to see the risk unwind go further before we step in to capture the upside opportunities.

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Conclusion

Investors are trying to grapple with the impact of the COVID-19 outbreak and the ramifications for global economic activity and corporate earnings. They can remain defensive while keeping an eye on policy responses, and expect further de-risking.

As market uncertainties persist, a dynamic approach to asset allocation is essential, alongside active management. Investing dynamically across multiple fixed income sectors can help investors tap long-term total return opportunities in a volatile market.

1. Source:  J.P. Morgan Asset Management. Data as at 31.12.2019.
2. Source: “Supporting Australian workers and business”, Prime Minister of Australia, 22.03.2020.
3. Source: “Federal Reserve issues FOMC statement”, 03.03.2020, 15.03.2020 and 23.03.2020.
4. For illustrative purposes only based on current market conditions, subject to change from time to time. Not all investments are suitable for all investors. Exact allocation of portfolio depends on each individual’s circumstance and market conditions. Provided for information only, not to be construed as investment recommendation. Investments involve risks, not all investment ideas are suitable for all investors.
5. Yield is not guaranteed. Positive yield does not imply positive return.
6. High-yield credit refers to corporate bonds which are given ratings below investment grade and are deemed to have a higher risk of default. For illustrative purposes only, exact allocation of portfolio depends on each individual’s circumstances and market conditions. Yield is not guaranteed. Positive yield does not imply positive return.
7. JPMorgan Global Bond Opportunities Fund (the “Fund”) will be substantially invested in shares that correspond to the JPMorgan Funds – Global Bond Opportunities Fund, a specific portfolio within the JPMorgan Funds, which is an open-ended investment company organised under Luxembourg law as a société anonyme qualifying as a SICAV and authorised under Part I of the Luxembourg law of 17 December 2010. For details, please refer to the Product Disclosure Statement of the Fund (available from https://am.jpmorgan.com/au/en/asset-management/adv/) to understand the various risks associated with investing in the Fund and in making any investment decision.

The information provided is general in nature only and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information you should consider the appropriateness of the information having regard to your objectives, financial situation and needs. Therefore, before you decide to buy any product or keep or cancel a similar product that you already hold, it is important that you read and consider the relevant JPMorgan fund Product Disclosure Statement (PDS), which is available to download on this website and make sure that the product is appropriate for you. Before making any decision, it is important for you to consider these matters and to seek appropriate legal, tax, and other professional advice. Issued by JPMorgan Asset Management (Australia) Limited ABN 55 143 832 080, AFSL No. 376919.