The rebound in equity markets extended into May. The impact of the COVID-19 pandemic continued to dominate markets, with an increasing focus on how countries would begin to relax their lockdown measures and how this would affect the economy. Volatility declined and the more moderate market moves compared to April suggest that investors are being watchful of how the situation develops.

Many states in the US began some level of reopening, though the daily infection rate has only fallen to around 65% of the peak infection rate from mid-April. The S&P 500 climbed to end the month 4.8% higher and is now just 10% below the February peak. The infection rate across the major European economies has fallen significantly, though the infection rate in the UK still remains high relative to its European peers.

Investors appeared to become somewhat more optimistic about the outlook after initial signs of success in human trials of a vaccine against COVID-19. Growth stocks outperformed value stocks while global government bond markets were broadly flat. European and Japanese stock markets, typically cyclical markets, also ended the month higher. Despite the first steps being taken to exit lockdown and some positive news on a potential vaccine, it’s still too early to say with confidence how the public health outlook will evolve.

Exhibit 1: Asset class and style returns

Source: Bloomberg Barclays, FTSE, MSCI, Refinitiv Datastream, J.P. Morgan Asset Management. DM Equities: MSCI World; REITs: FTSE NAREIT Global Real Estate Investment Trusts; Cmdty: Bloomberg Commodity Index; Global Agg: Barclays Global Aggregate; Growth: MSCI World Growth; Value: MSCI World Value; Small cap: MSCI World Small Cap. All indices are total return in US dollars. Past performance is not a reliable indicator of current and future results. Data as of 31 May 2020.

US

Economic data in the US has been particularly weak. The US unemployment rate for April reached 14.7%, the highest level in post-war history. With around 10 million additional people claiming unemployment insurance over the last month, the unemployment rate will continue to worsen in the next jobs report on 5 June. The flash purchasing managers’ indices showed that activity continued to weaken in May across both manufacturing and services. With stay-at-home orders in the US having started around the end of March and activity still not back to full capacity, the expectation is for second quarter GDP to be considerably worse than in the first quarter.

US corporate earnings reports for the first quarter of 2020 drew to a close in May and confirmed that earnings contracted by around 14% compared to the first quarter of 2019. Defensive sectors such as consumer staples, utilities and health care were more resilient and had positive earnings growth. High demand for technology driven by increased remote interactions helped to keep earnings in the IT sector robust. Financials, energy and consumer discretionary were the worst hit sectors. Earnings for the second quarter are expected to fall in excess of 40% year on year.

Almost all states have relaxed their lockdown orders to some degree despite the fact that several states are still experiencing an acceleration in new daily infections. As US states begin to increasingly relax their stay-at-home orders we will need to monitor the infection rate. As the US economy shut down, consumer spending fell dramatically, despite the increased spend on groceries.

After the US Federal Reserve (Fed) reacted quickly last month by increasing its balance sheet purchases, it made no meaningful adjustments to policy at its May meeting. The Fed Chair did signal a hesitance to using negative rates, particularly given some of the downside effects on the banking sector.

Exhibit 2: World stock market returns

Source: FTSE, MSCI, Refinitiv Datastream, Standard & Poor’s, TOPIX, J.P. Morgan Asset Management. All indices are total return in local currency, except for MSCI Asia ex-Japan and MSCI EM, which are in US dollars. Past performance is not a reliable indicator of current and future results. Data as of 31 May 2020.

UK

First quarter GDP in the UK fell by 2.0% quarter on quarter – the worst reading since 2008. The UK government’s Job Retention Scheme, introduced to limit job losses, was extended to the end of October, though some of the government’s contribution will shift to businesses from September. The scheme provides workers put on furlough with 80% of their salary (currently up to GBP 2,500 per month). The uptake of this Job Retention Scheme (JRS) has been sizeable with a recent Office of National Statistics (ONS) survey showing that around 77% of businesses have applied for the scheme. Despite this support, the claimant count rate, which looks at the number of people claiming benefits largely due to unemployment, increased from 3.5% to 5.8%.

The UK government announced further plans to continue to gradually reopen more sectors of the economy. There has been no material increase in daily infections but this will need to be monitored closely over the next couple of weeks. The FTSE All-Share rose by 3.4% over the month. The 10-year gilt yield fell slightly over the month and sits just below 0.2%.

Exhibit 3: Fixed income sector returns

Source: Bloomberg Barclays, BofA/Merrill Lynch, J.P. Morgan Economic Research, Refinitiv Datastream, J.P. Morgan Asset Management. Global IL: Barclays Global Inflation-Linked; Euro Gov.: Barclays Euro Aggregate Government; US Treas: Barclays US Aggregate Government - Treasury; Global IG: Barclays Global Aggregate - Corporates; US HY: BofA/Merrill Lynch US HY Constrained; Euro HY: BofA/Merrill Lynch Euro Non-Financial HY Constrained; EM Debt: J.P. Morgan EMBIG. All indices are total return in local currency, except for EM and global indices, which are in US dollars. Past performance is not a reliable indicator of current and future results. Data as of 31 May 2020.

Europe

The spread of the virus appeared to calm across the eurozone. The daily infection rate is now roughly 90% lower than its peak at the start of April. Austria and Denmark appeared to lead the way in reopening their economies.

Much of the attention in Europe has been over a European Union (EU) wide recovery plan. The plan would allow the European Commission to borrow EUR 750 billion in financial markets – equivalent to around 5.4% of EU GDP – to be funded by EU budgetary resources (contributions are based on a country’s Gross National Income). The proposal is for EUR 500 billion of  spending to be made available, mostly as grants, and to make EUR 250 billion of loans available  to any EU country but focused on those most in need. This should help countries with already high debt levels, such as Italy, to access funding without having to issue more of their own debt.  The spread of the 10-year Italian government bond yield over Germany fell by 43 basis points in May and so Italian government bonds returned 1.7%.

The European Central Bank (ECB), under the terms of its purchase programmes bought over EUR 125 billion in government and corporate bonds over the past month. With the outline of a recovery fund announced by the European Commission, expectations are for an increase in the ECB’s pandemic purchase programme at its next meeting on 4 June. European high yield gained 3.0% on the month.

Exhibit 4: Fixed income government bond returns

Source: Bloomberg Barclays, Refinitiv Datatsream, J.P. Morgan Asset Management. All indices are Bloomberg Barclays benchmark government indices. All indices are total return in local currency, except for global, which is in US dollars. Past performance is not a reliable indicator of current and future results. Data as of 31 May 2020.

Emerging markets and Asia

The number of reported cases in some parts of Asia has been trending down and economies are reopening, particularly in China and South Korea. High levels of testing and contact tracing have been a key feature of their exit strategies. Falling cases in Japan are also a positive for the region. However, a large increase in cases in India and Brazil have put pressure on their economies and restricted gains in emerging market equities. Despite this situation, emerging market debt was the best performing fixed income asset class in May, returning 5.9%.

Conclusion

Investors have found some cause for optimism as global containment measures have seen infection rates come down in many countries. The focus over the last month has shifted towards how successful countries will be with their lockdown exit strategies. There are tentative signs that countries are seeing increased activity, but countries which have been successful in preventing a second wave of infections have so far been opening very gradually.

Economic activity over the past month suggests that the second quarter will be worse than the first but investors are looking ahead to a possible recovery. However, significant uncertainty remains over when economies can fully and sustainably reopen and how quickly they will rebound. The longer infection rates remain high and social distancing is required, the more likely there will be more lasting impacts on the economy. Central banks and governments have so far helped cushion the blow to the global economy and markets but success will be measured by the extent to which companies avoid solvency problems and workers return to employment. Given the inherent uncertainty, investors might want to remain neutral on the outlook. We favour an ‘up in quality’ approach both within fixed income and equities with a  focus on companies with strong balance sheets that would benefit from an improvement in the  outlook but could also survive if the health outlook deteriorates.

Exhibit 5:Index returns for May 2020 (%)

Source: Bloomberg Barclays, MSCI, Refinitiv Datastream, J.P. Morgan Asset Management. Past performance is not a reliable indicator of current and future results. Data as of 31 May 2020.