A tough test for global economic resilience

The fast-spreading respiratory disease is likely to severely damage global growth in the first half of 2020. In Australia, a measure of consumer sentiment³ fell 17.7% from 91.9 in March to 75.6 in April, the lowest since 1991 when Australia last experienced a recession. Unemployment⁴ will likely double in the second quarter from 5.1% to 10%, according to figures released by the Australian Treasury on 14 April.

Central banks have acted swiftly and are implementing aggressive policies including asset purchases and liquidity injections to offset the economic fallout and restore financial stability. Many governments have also rolled out sizeable stimulus packages to support businesses and low-income families. The Reserve Bank of Australia has pushed interest rates to as low as they will go and started down the unconventional policy path with a yield curve control policy, and measures to support small and medium-sized enterprises.

Against the current backdrop, we believe a gradual global economic recovery in late 2020 is likely. And the strength of the economic rebound will be determined by the duration of the pandemic and the effectiveness of policy stimulus.

Correlations between stocks and sovereign bonds⁵

Past performance is not a reliable indicator of current and future results.

Targeting quality assets^2,6

As investors grapple with the economic impact on consumption and manufacturing disruptions, adopting a more defensive bias in asset allocation could be optimal.

Central banks have acted swiftly, reinforcing our view that monetary authorities are focused on protecting growth while willing to tolerate inflation risks. In this regard, policy rates around the world are likely to drift lower in the medium term.

Yield generation will likely become more challenging, and price fluctuations of selected bonds are now a key concern for some investors.

Developed market government bond yields are now depressed by aggressive monetary easing while valuations in corporate credit have declined. Hence, high-quality corporate debt presents attractive opportunities as part of a fixed income allocation in these market conditions.
 

Deploying tactical flexibility²

Fears of the negative economic implications of the pandemic have led to a significant re-pricing across markets and asset classes. In markets like this, having the flexibility to deploy different investment tools can help build portfolio resilience. For example, some mutual funds can use futures and options strategies in a similar manner to hedge funds, seeking to take advantage of market mispricings of macro trends for potential attractive risk-adjusted return opportunities.

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Conclusion

Market volatility will likely persist, correlating with the number of new infections. Adopting a defensive bias in allocation and deploying tactical flexibility may help build portfolio resilience while seeking risk-adjusted return opportunities.

Provided for information only based on market conditions as of date of publication, not to be construed as investment recommendation or advice. Forecasts/ estimates may or may not come to pass.

1. Diversification does not guarantee investment return and does not eliminate the risk of loss.
2. 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.
3. Source: Bloomberg Finance L.P. The Westpac-Melbourne Institute Index of Consumer Sentiment released on 15.04.2020.
4. Source: Treasurer of the Commonwealth of Australia. “Jobkeeper payment supporting millions of jobs”, released on 14.04.2020.
5. Source: Bloomberg Finance L.P., FactSet, MSCI, J.P. Morgan Asset Management; Standard & Poor’s.
*Rolling six-month pairwise correlations between weekly returns in equity (S&P 500 and MSCI All Country World Index price indexes) and bond (Bloomberg Barclays US Aggregate Government Treasury and Bloomberg Barclays Global Aggregate Government Treasuries price indexes) markets.
Global equities represented by MSCI AC World Index, global bonds represented by Bloomberg Barclays Aggregate Global Bond Index. Past performance is not a reliable indicator of current and future results. Data reflect most recently available as of 31.03.2020.
6. Source: FactSet, MSCI, J.P. Morgan Asset Management. Positive yield does not imply positive return. Past performance is not a reliable indicator of current and future results. Data reflect most recently available as of 31.03.2020. 

Investment involves risk. Not all investments are suitable for all investors. Past performance is not a reliable indicator of current and future results. Please refer to the offering document(s) for details, including the risk factors. Investors should consult professional advice before investing. Investments are not similar to or comparable with fixed deposits. The opinions and views expressed here are as of the date of this publication, which are subject to change and are not to be taken as or construed as investment advice. Estimates, assumptions and projections are provided for information only and may or may not come to pass. This document has not been reviewed by the SFC. Issued by JPMorgan Funds (Asia) Limited.