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J.P. Morgan Asset Management - The investment implications of COVID-19: An update - March 2020

Global financial markets have continued to sell off in recent days as COVID-19 fears have mounted.

12 March 2020


While this is a global health crisis with very significant human and economic impacts, it is important for investors to consider the issue and its implications in a disciplined and calm manner. A good way to do this is look at:


  • Updated numbers and trends in the COVID-19 pandemic
  • Potential economic impacts
  • Monetary and fiscal policy responses
  • The longer-term economic outlook
  • Investment implications

First, as of March 11th, using World Health Organization numbers, there were 118,322 confirmed cases of COVID-19 worldwide, with 4,292 fatalities. While the majority of both of these numbers were in China, the Chinese outbreak appears to have plateaued, with most of the growth occurring outside of China. Excluding China, there were 37,367 cases with 1,130 fatalities. Over the past week, the number of confirmed ex-China cases has risen by 195%, and the crude fatality rate outside of China (i.e. total cumulative fatalities/total cumulative confirmed cases) is running at 3.0%.


Going forward, even with increasingly significant public and private efforts aimed at social distancing, the number of confirmed cases is likely to rise sharply. However, since part of this will reflect enhanced testing and many cases of COVID-19 are mild, the crude fatality rate is likely to come down substantially. In addition, social distancing should have some impact in slowing the spread of the disease.


Longer term, better anti-viral treatments for those infected could also reduce mortality rates and, while a global effort to produce effective vaccines may take longer than we would all hope, history suggests that it will ultimately be successful. The spread of the disease may also be impeded by the onset of warmer weather in the Northern Hemisphere and, in a sobering worst-case scenario, a growing share of the world’s population should develop an immunity to the virus by virtue of having contracted and then recovered from it.


Still, while we can hope that both the spread of the disease and the mortality rate fall over time, it is, as of right now, sufficiently contagious and dangerous to warrant and cause significant lifestyle changes either by government edict or private decisions.


Second, on the economic effects, the economy was very healthy entering 2020, with low inflation, low unemployment and slow and steady economic growth. This fact, and the reality that the virus became a significant global issue late in the first quarter, makes it likely that the first quarter will still see solid real GDP growth. Even the effects of the virus on the economy in March could be mixed, with very strong sales of grocery and warehouse stores as people stocked up, offsetting growing weakness in the travel and entertainment industries.


However, in the second quarter, the negative impacts of social distancing should begin to hit the economy hard, with very sharp declines likely in cruises, airlines, hotels, casinos, sporting events, movies, theatres and restaurants among other industries. This will likely result in a negative quarter for real GDP growth both in the U.S. and globally. A second quarter of negative growth could come from knock-on effects on employment. While many companies will want to postpone layoffs, some will have no choice. In addition, broad hiring freezes will likely result in net payroll job losses for a number of months to come. History suggests that when the economy enters recession, the unemployment rate rises at a pace of 2% per year. However, the suddenness and severity of this slowdown could make unemployment rise at a faster pace this time around, with only slow growth in the working-age population limiting its climb.


All of this being said, the American economy, like economies around the world, will gradually adjust to a new “social distancing” reality. While in-person gatherings will be curtailed, the use of more sophisticated communications technology will rise. Streaming entertainment will become more important and the demand for medical services and supplies will also rise sharply. Moreover, at some stage, regardless of the extent of the human and economic toll, the effects of the coronavirus will fade and life will return to normal. If 2020 is the year of the virus, 2021 will likely mark a first year of recovery.


The impact of the virus on the economy and markets should also be softened by monetary and fiscal policy.


In the U.S., the Federal Reserve has already cut interest rates by 50 basis points to a range of 1.00%-1.25% and will likely cut rates further to an effective lower bound of 0%-0.25% in the next few weeks. Lower short-term interest rates will not be particularly effective in helping the industries or individuals most hard-hit by social distancing. However, to the extent that lower short-term interest rates feed through to lower long-term rates, they will increase the relative attractiveness of stocks over bonds for investors.


On the fiscal side, while there will be some political squabbling, a sizable package is likely, aimed at helping small businesses and individuals ride out the storm and, presumably, aiding a healthcare system that is likely to see huge strains in the months ahead.


Longer-term the economy will recover, as the effects of the virus fade and the economy adapts, to some extent, to a new more socially distant reality. That reality may leverage more information technology, favoring on-line entertainment over live shows, games and movies. It may mean more video technology and fewer flights and hotel stays in business. It may engender healthier habits if those who smoke or have high blood pressure recognize their greater risk in a viral outbreak. And it may foster a new, broader commitment to public health as Americans come to the realization that the health of any one of us depends, to some extent, on the health of all of us, both in the United States and around the world.


For investors, it is also important to take a long-term view. In particular,


  • The COVID-19 crisis confirms, once again, the value of a diversified portfolio as gains in Treasury bonds have, to some extent, offset stock market losses.
  • The current crisis also reminds us of the value of high-quality assets. A crucial first step for any company to thrive in a rebound is to be able to survive a downturn.
  • The crisis should prove the value of active managers, as skilled investors adjust portfolios both to weather the storm but also to take advantage of the altered economic and social landscape that is likely to follow.
  • Finally, the crisis will underscore the importance of valuations across financial assets. The last few years - relatively calm years from an economic perspective - have allowed some valuations to become unhinged from others with investors generally paying a premium for hopes and dreams and demanding a discount for prudence. This crisis reminds us that no single aspect of an investment is as important as the ability to get in at a reasonable price at the start. No matter how volatile financial markets are in the weeks ahead, opportunities will emerge for investors who can think and act with discipline in an increasingly emotional environment.


Important information

This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature or other purpose in any jurisdiction, nor is it a commitment from J.P. Morgan Asset Management or any of its subsidiaries to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical and for illustration purposes only. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit and accounting implications and determine, together with their own professional advisers, if any investment mentioned herein is believed to be suitable to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.



March 2020

Please note that these are the views of Dr. David Kelly, Chief Global Strategist and Head of the Global Market Insights Strategy Team for J.P. Morgan Asset Management and should not be interpreted as the views of RL360.


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For more information about JP Morgan funds visit www.jpmorganassetmanagement.lu/



Author

Dr. David Kelly

Chief Global Strategist and Head of the Global Market Insights Strategy Team for J.P. Morgan Asset Management


March 2020


Please note that these are the views of Dr. David Kelly of J.P. Morgan Asset Management and should not be interpreted as the views of RL360.

360 fund links

A range of J.P. Morgan funds can be accessed through our guided architecture products Regular Savings Plan, Regular Savings Plan Malaysia, Oracle, Paragon, Quantum, Quantum Malaysia, LifePlan, Protected Lifestyle and Protected Lifestyle Lebanon, and also through our PIMS portfolio bond.