jpm_asset_mgmt
  • Investment Strategies

    Investment Options

    • Alternatives
    • Beta Strategies
    • Equities
    • Fixed Income
    • Multi-Asset Solutions

    Capabilities & Solutions

    • ETFs
    • Pension Strategy & Analytics
    • Global Insurance Solutions
    • Outsourced CIO
    • Sustainable Investing
  • Insights

    Market Insights

    • Market Insights Overview
    • Eye on the Market
    • Guide to the Markets
    • Guide to Alternatives
    • Market Updates

    Portfolio Insights

    • Portfolio Insights Overview
    • Alternatives
    • Asset Class Views
    • Currency
    • Equity
    • ETF Perspectives
    • Fixed Income
    • Long-Term Capital Market Assumptions
    • Sustainable Investing

    Retirement Insights

    • Retirement Insights Overview
    • Essential Elements of a Sound Retirement System
    • Building Better Retirement Portfolios
  • Resources
    • Center for Investment Excellence Podcasts
    • Insights App
    • Library
    • Multimedia
  • About us
  • Contact Us
Skip to main content
  • English
  • Role
  • Country
  • Client Reporting
Search
Menu
CLOSE
Search
  1. Home
  2. Insights
  3. Market Insights
  4. Market Updates
  5. On the Minds of Investors
  6. What could upset a happy New Year?

  • Share
  • LinkedIn Twitter Facebook Line
  • Print
  • Actions
  • LinkedIn Twitter Facebook Line
    Print

What could upset a happy New Year?

2020/12/16

Tai Hui

As we approach the end of an extraordinary year, investors are hopeful that 2021 would offer a better time for the global economy, which will be constructive for risk assets, such as equities, corporate credits and emerging market fixed income. We agree with this assessment (for more, please see our 2021 Year Ahead), but it is still worth considering some of the event risks in coming weeks that could introduce market volatilities.

The first is the risk of the UK heading towards a “no deal” scenario by December 31 in its Brexit negotiations with the European Union. At the time of writing, both sides are still negotiating, but differences on a level playing field for business rules and regulations and fishing rights are the main stumbling blocks. A deal to ensure a smooth transition is still in the best interests of both sides, but politics can still get in the way. In the event of a “no deal” scenario, we could see some UK financial assets exposed to the domestic economy under the greatest pressure, given the potential disruptions, but the global impact should be manageable.

Another political event after the New Year is the Georgia Senate runoff election on January 5. While Georgia has traditionally been a Republican stronghold, President-elect Biden did win this state by a razor-thin margin in the presidential election. The extraordinary amount of campaign funding and resources devoted to these two races by both parties also make the outcome highly unpredictable. The current market consensus seems to be that the Republican Party will win at least one of the two seats, hence maintaining its Senate majority. If the Democratic Party wins both seats, then we will have a 50-50 tie in the Senate, with Vice-President-elect Harris casting the tie-breaking vote. The Democrat Party would then achieve the “clean sweep” by controlling the White House, the House of Representatives and the Senate. This would imply Biden’s campaign pledges, such as corporate tax hikes, health care and energy reform, could be back on the table even though the degree of political difficulty to pass them is still significant. These legislations could potentially impact the earnings outlook and interrupt the recent sector rotations brought by breakthroughs in vaccine development.

The final event will be the implementation of vaccination programs around the world. Several vaccines have already received regulatory approval in some countries and have been rolled out to health care workers and the more vulnerable groups. These programs are expected to expand in coming months. As the vaccinated population rises, medical experts should get even more data on the effectiveness of these vaccines for different groups in the population and observe whether there are any unknown side effects. The data would also influence public confidence and impact  the general public’s willingness to get vaccinated. All these factors would impact how quickly our lives can return to normal. The longer the recovery, the higher the risk of default for some financially weaker companies.

Exhibit 1: Volatility

Source: FactSet, J.P. Morgan Asset Management.
*The VIX-CBOE Volatility Index measures market expectations of near-term volatility conveyed by S&P 500 Index (SPX) option prices. **First day when VIX breaks 35; subsequent spikes above 35 within the next six months are not included. ***Number of days for VIX to return to its long-term average after initial VIX spikes above 35.
Guide to the Markets – Asia. Data reflect most recently available as of 11/12/20.

Investment implications

Despite our optimism on an economic recovery in 2021, there are always political and event risks that investors should not forget. This calls for a well-diversified portfolio. One big challenge is that developed market government bonds only offer very low, if not negative, yield and they have not offered much protection to the equity market correction in recent months. Hence, investors would need to find alternative ways to diversify their portfolios. For local political risks like Brexit, investing in a broad number of markets, such as U.S., Asia, China and other emerging markets can help. Another important principle for investors to consider will be their long-term investment objectives. Some of these risk factors may create short-term market volatility, but do not fundamentally change the long-term economic and growth prospects. Investors should then stay their courses and ensure their asset allocation is consistent with their financial objectives. 

0903c02a82aab94d

EXPLORE MORE

On the Minds of Investors

What investment questions are on the minds of investors? Explore the questions investors ask frequently and find answers at J.P. Morgan Asset Management.

Read more

Guide to the Markets

The J.P. Morgan Guide to the Markets illustrates a comprehensive array of market and economic histories, trends and statistics through clear charts and graphs.

Read more

Asset Class Views

Get quarterly commentary and in-depth analysis on equities, fixed income and other asset classes, written by our senior investment teams.

Read more
J.P. Morgan Asset Management

  • About us
  • Investment stewardship
  • Privacy policy
  • Cookie policy
  • Binding corporate rules
  • Sitemap
Opens LinkedIn site in new window
J.P. Morgan

  • J.P. Morgan
  • JPMorgan Chase
  • Chase

READ IMPORTANT LEGAL INFORMATION. CLICK HERE >

The value of investments may go down as well as up and investors may not get back the full amount invested.

Copyright 2021 JPMorgan Chase & Co. All rights reserved.