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Investing during the COVID–19 outbreak: 4 topmost concerns

By JPMorgan Asset Management
13 March 2020
investing-during-the-covid19-outbreak.jpg

Key takeaways:

  • As the world races to contain the spread of coronavirus disease 2019 (COVID–19), what are the topmost concerns on investors' minds?

    1.  How would it impact the global economy?

    2.  Will the outbreak derail Asia's economic growth?

    3.  Will Asia's central banks roll out more monetary easing?

    4.  What is China doing now to manage growth?

The outbreak of COVID–19 has dominated news headlines in recent months. As of 2 March, the number of confirmed cases has exceeded 88,000 in over 65 locations globally1.

Financial markets are reacting to the public health crisis, and risk averse sentiment is building up. The US Federal Reserve (Fed) on 3 March cut the federal funds rate by 0.5% to a target range of 1.00%–1.25%, citing the “evolving risks to economic activity” posed by the public health crisis. This is the Fed's first inter–meeting rate cut in more than 10 years.

Against this backdrop, what are the topmost concerns on the minds of investors? Our global market strategists share their views.

Q1. How would it impact the global economy?
Background:

  • The number of confirmed COVID–19 cases is rising across the globe, raising concerns that the global economic impact could be more profound.

Economic impact:

  • The Fed on 3 March cut the federal funds rate by 0.5% to a target range of 1.00%–1.25%, in their first inter–meeting rate cut since 2008. In an emergency press conference, Fed Chairman Jerome Powell said that the Fed took this action as it saw that the coronavirus was having a material impact on the economic outlook.
  • Some economists have revised their first–quarter economic growth forecast for China to 3.9% year–on–year, down from 5.9% forecast at the beginning of 20202.
  • Travel restrictions in South Korea, Italy and other locations may lead to growth and earnings downgrades even though the magnitude remains unclear at this stage.
  • Economic contagion could also occur through supply chain disruption.

Hear what our expert says
“The more the virus affects activity globally, the greater will be the impact on corporate earnings. The clear investment implication is that, even more than usual, a well-diversified portfolio is essential.”
- Tai Hui, Chief Market Strategist, Asia Pacific



investing-during-the-covid19-outbreak-chart01.jpg

Q2. Will the outbreak derail Asia's economic growth?
Background:

  • China has yet to resume full production capacity. This could dent its headline economic growth in the first quarter further, and raise Asia's downside risk to growth.

Government actions:

  • China has waived value–added taxes, social contributions, rent and other charges to ease businesses' burdens3.
  • Singapore is planning to run a 2020 Budget deficit of S$10.9 billion, or 2.1% of gross domestic product, the highest since 19974.
  • Hong Kong has announced a HK$30 billion fiscal relief package to sectors hardest hit by the outbreak, as well as record size fiscal deficit for 2020 to support the economy5.

Hear what our expert says
“We expect Asian economies to experience a sharp drop in growth in 1Q 2020, but this should be followed by a prompt rebound once the infection rate comes under control.”
- Tai Hui, Chief Market Strategist, Asia Pacific



Q3. Will Asia's central banks roll out more monetary easing?
Background:

  • Asian central banks were active in policy easing in 2019 to counter the negative impact from the US–China trade row and slower growth in China.
  • Asian and emerging market central banks have more room to cut, if needed, than their developed market counterparts.

Central bank actions in 2020:

  • China took the lead with a 10–basis–point (bp) cut in the interest rate for reverse repo on 3 February6. It has also launched a special lending programme making funding available, via commercial banks, to sectors that are combating the coronavirus outbreak7.
  • Philippines and Thailand also opted to cut their policy rates by 25bps. Both central banks cited the COVID–19 outbreak as one of the factors for their decisions8.

Hear what our expert says
“The prospects of more rate cuts in Asia imply Asian fixed income could be an asset class that could provide diversification benefits to investors during the current period of economic uncertainties”
- Tai Hui, Chief Market Strategist, Asia Pacific



Q4. What is China doing now to manage growth?
Background:

  • The “brick and mortar“ service sector, including restaurants, cinemas, education and shopping malls, has been the worst–hit by the Chinese government's lockdown measures.
  • Small and medium–sized enterprises (SMEs) in the service sector are facing depleting cash reserve, coupled with rigid payments in salary, rental, interest and social security contributions.

Government actions:

  • Some local governments, such as Suzhou, are organising resources within their jurisdictions to support SMEs, including tax payment extension or exemption9.
  • The People's Bank of China took the lead to cut interest rate for reverse repo by 10 bps on 3 February – a key move that helped banks lower their lending rates6.

Hear what our expert says
“The Chinese authorities have resources at its disposal to partially offset the negative economic impact. This could help to facilitate the recovery in economic activities once the number of new cases plateau.”
- Chaoping Zhu, Global Market Strategist



Conclusion
Risk aversion among investors will likely prevail should the number of confirmed COVID–19 cases continue to rise globally in the weeks ahead. As uncertainties from the outbreak are likely to persist, diversifying across asset classes and geographies could help investors build a resilient portfolio and better navigate changing market conditions.

You may also visit JPMorgan Asset Management's website to learn more.



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Sources:

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. Diversification does not guarantee investment return and does not eliminate the risk of loss.

Investment involves risk. Not all investments are suitable for all investors. Investors should consult professional advice before investing. Investments are not similar to or comparable with fixed deposits. It does not constitute investment advice and it should not be treated as an offer to sell or a solicitation of an offer to buy any fund, security, investment product or service. The information contained herein does not constitute J.P. Morgan research and should not be treated as such. The material was prepared without regard to specific objectives, financial situation or needs of any particular receiver. The opinions and views expressed here are as of the date of this publication, which are subject to change. This advertisement or publication has not been reviewed by the Monetary Authority of Singapore. Issued by JPMorgan Asset Management (Singapore) Limited (Co. Reg. No. 197601586K). All rights reserved.



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Information is correct as of 13/03/2020.