A tough test for global economic resilience

The fast-spreading disease is likely to severely damage global growth in the first half of 2020. Already, it has hurt China’s consumption and manufacturing production, as reflected by the Purchasing Managers’ Index⁴, and the social distancing policies⁴ are significantly impacting the service sector in the US and Europe. 

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. In China, the economy is expected to gradually recover as the number of new infections decline and production resumes.

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

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

• High-quality corporate debt^2,3
  
  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 could be part of a fixed income allocation, based on investors’ investment objectives and risk appetite.
  
  
• Dividend stocks^2,3
  
  Earnings downgrades and valuation de-rating are likely to remain in the near term with continued containment measures in the US and Europe. Investors may consider opportunities in some Asian high-dividend equities, based on investors’ investment objectives and risk appetite.
  
  Governments and central banks in Asia have more room for economic stimulus, and they have been using fiscal policy to support businesses during the outbreak. Furthermore, there is a broader choice of high-dividend opportunities in Asia when consistent income flow is valued in the current low-yield environment.
  
  

Number of companies yielding greater than 3% by region⁶

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

Conclusion

Market volatility could continue to spike, correlating with the number of new infections. A well-diversified¹ portfolio with a defensive bias could help build portfolio resilience while seeking potential yield³ 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. Yield is not guaranteed. Positive yield does not imply positive return.
4. Source: J.P. Morgan Economic Research, Markit, J.P. Morgan Asset Management. Data reflect most recently available as of 31.03.2020.
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.