J.P. Morgan Asset Management is pleased to present the latest edition of Quarterly Perspectives. This piece explores key themes from our Guide to the Markets, providing timely economic and investment insights.

THIS QUARTER’S THEMES

Market drivers: Pandemic, policies and politics

Overview

• The pace of the global economic recovery could moderate as we approach the end of the year. Governments are still trying to strike a balance between maintaining economic momentum and mitigating the risk from new waves of infections. Vaccine development will be key for sustaining the economic recovery.

• Meanwhile, central banks are maintaining monetary support for governments to spend and help businesses and households. This implies risk-free rates are likely to stay low for longer. Still, inflation risk is not an immediate concern.

• The market impact of the U.S. elections will depend on whether the next president will get full support from Congress. Nonetheless, we believe the current monetary policy backdrop and structural growth trends would be more relevant to long-term investors.

Waiting for the next catalyst after completing Stage 1 of recovery

Aggressive policy actions and businesses quickly adapting to the “new COVID-19 normal” helped the global economy rebound from the lows in April and May.

• However, governments are still striking a balance between reopening for business and containing the pandemic. We note the new waves of infections in Europe and Asia as social distancing and travel restrictions were relaxed.

• Consumer spending has rebounded in the U.S. and Europe, where governments have provided solid support to households. In China, production and public investment have led the way in its economic recovery. 

Central banks working in tandem with governments to keep the economy going

Until COVID-19 is defeated, governments will find it difficult to withdraw their fiscal support.

• Considering the fiscal burden from the various stimulus programs, some governments may have to scale back on unemployment and business support. However, fiscal deficits for the next 6-12 months are likely to be high, taking into account automatic stabilizers such as increased social benefit spending and lost tax revenue.

• This would imply a heavy government bond supply that would require central banks’ ongoing support, via asset purchases, in order to keep bond yields steady. This would be critical to keep corporate borrowing costs low as well. Investors should recall the Federal Reserve (Fed) took a decade to start reducing its balance sheet and raise rates after the global financial crisis.

The next U.S. president needs congressional support

There are significant differences between the policy direction of the two U.S. presidential candidates on taxes, health care, energy and foreign policy.

• Either candidate will need strong party support from both the House of Representatives and the Senate to push through their policy agenda. It is still too early to call for such a “clean sweep.” Dealing with the pandemic and the economic fallout is likely to be prioritized over major policy shifts, such as fiscal consolidation.

• Washington’s attitude toward China is likely to remain hawkish regardless of the election outcome, even if the two candidates could adopt different approaches when interacting with Beijing. 

• Politics is not all that will decide on market return in the long run. Underlying monetary policy trend and structural growth factors are also critical in asset allocation decisions.

Investment Implications

• With risk-free rates likely to stay low, income generation remains high on the agenda and has become increasingly challenging. This would call for more risk-taking in fixed income, including securitized assets as well as alternative assets and high-dividend equities. 

• A more sustainable improvement in the pandemic outlook could lift the lagging sectors and fuel the equity rally. Vaccine development remains a critical catalyst. 

• Even though inflation risk is low in the near term, investors should take into account investing with inflation if governments and central banks do not withdraw their economic stimulus packages when the global economy recovers.

Asia is still looking good

Overview

• Further post-lockdown recovery, as witnessed by the recent bottoming of several indicators, could continue to gain momentum within Asia. 

• However, consumer confidence and broad sentiment remained subdued with the resurgence of COVID-19 cases in certain economies and evolving U.S.-China relations.

• The pandemic is a significant setback for the region, but we believe it has actually accelerated or magnified ongoing structural growth trends to the benefit of Asia’s economic and market performance.

Asia’s recovery is still on track despite ongoing uncertainties

Despite the setback in growth, lifestyle and consumption upgrades in Asia, alongside changing habits from rising wealth and ongoing economic development, will likely continue to underpin the region’s outlook, potentially delivering returns to investors.

• Asia is still suffering the economic fallout from COVID-19 but should see a “first-in, first-out” upturn in its recovery. 

• As Asia’s export performance has been closely related to its corporate earnings performance, a sustained recovery in exports could further support Asian equities.

• Evolving U.S.-China relations, the pandemic and U.S. elections are the key foreseeable risks, but domestic demand and continued structural growth in Asia will continue and should provide some buffer against market volatility.

Asian equities still look favorable

Asian equities have been trading on strong footing amid a recovery in earnings, better-than-expected economic data, a declining U.S. dollar (USD), progress on vaccine development and the relaxation of monetary policy.

• Earnings revisions have improved significantly, with the Asia Pacific ex-Japan upgrade/downgrade ratio no longer in favor of downgrades. The latest results are also largely in line in Asia, with particularly strong numbers in Taiwan, Korea, China and most new economy sectors/stocks.

• A weak USD could be a boon for Asia as this makes debt servicing and access relatively cheaper. We believe the USD is likely to remain on the weaker side because of rate differentials, slow economic recovery and uncertainty over the upcoming U.S. elections.

New-economy sector on the rise

We believe the consumer, information technology and health care sectors are still the super trends in the current environment. We think there will be a shift toward increased spending on higher-quality products, higher efficiency and better protective measures against COVID-19. This would create a favorable fundamental backdrop for these sectors.

• Many new-economy stocks, for example in the staples and IT sectors, are delivering earnings expectations and are expected to benefit from the ongoing recovery.

• We feel the COVID-19 pandemic has accelerated or magnified the ongoing structural growth trends within Asia, and the Asian story is increasingly about the region’s goods and services for regional consumers and corporates.

Investment Implications

• Geopolitics will likely dominate the headlines, but as investors, we should continue to focus on fundamentals such as broader trends in stock-specific opportunities.

• The domestic demand and continued structural growth story should still continue to provide some buffer against market volatility, as well as income that contributes to total return.

• The current situation is likely to see these trends magnified as countries find their footing in the recovery. The Asian equity story is increasingly about the region’s goods and services for regional consumers and corporates. Investors can benefit from Asia’s recovery and ongoing structural growth trends.