April 29, 2020
Gold is the asset to hold during a pandemic and mobility restrictions are likely to be in place until next year according to a J.P. Morgan poll of investors held during this month’s meeting of the International Monetary Fund (IMF) and World Bank.
Capturing the mood of the investment community as the global lockdown continues, the poll also revealed that most investors believe the economic recovery will resemble that of the Global Financial Crisis. 46% said that the recovery is likely to be U-shaped as it was after the 2008 crash.
The poll was taken during J.P. Morgan’s virtual conference for more than 1,700 investors held to coincide with April’s meeting of global policy makers and official creditors earlier this month.
Investors listened in as business leaders, policy makers, academics and J.P. Morgan analysts assessed the fallout of the COVID-19 pandemic on the global economy, trade, currencies and oil, and predicted when normalcy might return.
Here are the key takeaways:
The COVID-19 crisis has escalated rapidly from a medical to an economic crisis, with 2020 global real GDP being revised from +3% to -4.7% within three months. Lockdowns have seen production as well as consumption being affected severely across the world, and the consequent drying up of cash flows could trigger defaults. J.P. Morgan is forecasting a 15% to 20% rise in public sector debt, with corporate debt also set to balloon and a significant rise in bankruptcies.
The true cost of a recession will be the lost production and incomes while the economy is underperforming. J.P. Morgan now expects a 3.8% shortfall in global GDP at the end of 2021 relative to its pre-pandemic path.
Central bank responses to addressing liquidity risk and market dysfunction have been swift and powerful. Compared to past crises, they have moved from setting monetary policy to taking on credit risk.
The Federal Reserve has taken the lead, rapidly adopting the role of the central bank to the world, and the government response has gone beyond that seen during past cycles both with respect to scope, speed and size. The Fed has quickly set a floor for managing this crisis, implicitly acknowledging the global implications of the pandemic; it has been swift to adapt and go beyond the toolkit from the 2008/09 crisis to avoid a systemic shock to global financial markets.
The European Central Bank’s (ECB) short-term policy response has also been impressive. In contrast to the past crises, it has shown that it is prepared to take much more credit risk this time around.
Hopes for a V-shaped economic recovery are likely to be disappointed, and at the minimum, the U.S. is facing a major recession.
Some speakers felt that the April/May period would represent the bottom and that the Fed’s actions have likely set a floor, with a double dip back to the lows of March unlikely. However, a worrisome mix of rising corporate debt and significant profit loss leave little doubt that the damage from the 2020 pandemic will be lasting.
Regarding the growth rebound from COVID-19, 46% of investors polled at the conference said that a U-shaped recovery similar to the Global Financial Crisis is most likely, double the number of those who anticipate a W-shaped recovery (23%); 18% expect a more enduring recession materially impacting medium-term growth and 13% expect a V-shaped recovery in 2H20.
China and North Asia are ahead of other parts of the world — including many developed economies — in addressing the pandemic, in their capabilities to execute a return-to-work strategy, and in dealing with a potential second or third wave of contagion.
China is leading the path out of the dark hole and its recovery began in March while activity collapses elsewhere. Its recovery is V-shaped, on track to continue in 2Q and 3Q. In the investor survey, a new winner also emerged among countries expected to be the best performer across asset classes this year, as China came out on top (50%), followed by Russia (24%) in second place.
Gold emerged as the top-performing asset in 2020, overtaking Emerging Market equities for the first time in many years. On the top-performing asset class in 2020 survey question, gold took the top spot (26%), followed by relative safe-haven asset classes supported by the Fed backstop, such as developed market high-grade credit (23%) and U.S. Treasuries (19%). Liquidity has recovered about 50% of the move down for asset classes receiving Fed support.
It is very difficult for the dollar to weaken unless the virus situation stabilizes and there is more clarity on the duration of the crisis and the scale of the economic damage.
Questions about the capacity of European countries to come up with a coordinated plan to help the most affected members of the Eurozone will likely keep the euro from staging a sustained recovery versus the dollar. In the case of emerging markets (EM), the narrative of growth, carry and convergence is being tested and EM currencies are unlikely to rebound to previous levels, so the dollar’s strength looks here to stay.
The OPEC+ agreement to cut oil production has struggled to put a floor on oil prices as it has not addressed excess supply or the dramatic drop in global demand, while concerns about the lack of storage capacity persist. Investors expect the Brent to remain range-bound in the audience survey, with 43% citing a $30-40 range for the full year, and another 38% seeing the $20-30 range.
As the outbreak and financial stress are contained, reaching the peak infection rate may not be the best signal to gauge market confidence or the time for investors to add risk. Rather, the focus of markets has shifted to the speed and success of return-to-work strategies.
In the audience survey, only 11% of respondents expect normalcy to be restored in the next couple of months by June, while 34% expect there would be another wave that would keep rolling restrictions into 2021. In turn, 30% envision an end by summer’s end allowing the school year to resume on schedule, and 25% see a resumption sometime in the fourth quarter.
It is still early, but the perception that Trump can be defeated seems to have increased dramatically since the COVID-19 outbreak. In the audience poll, 46% said they believe that Joe Biden could win the elections compared to 39% indicating that President Trump will be re-elected.
However, despite the economic downturn, U.S. political observers stated that a blue wave is not inevitable, and the November 2020 outcome is still a toss-up at this juncture. Trump continues to benefit from being the incumbent and having loyal core supporters and constant media exposure.
Biden still needs to generate enthusiasm and unite the various Democratic forces — including those who supported other presidential candidates.
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