Post on 25-Jul-2020
transcript
Monthly Market Review
MARKET INSIGHTS
April 2020
Fighting two extraordinary battles with many extraordinary measures
The COVID-19 virus outbreak turned into a global pandemic in March. As the outbreak started to come under control in China, the spread of infection accelerated in Europe and the United States. Governments around the world are taking drastic steps to contain the outbreak, including closing borders and restrictive social distancing measures. There are growing signs that the global economy will face an unprecedented synchronized recession in the weeks and months ahead. This is no longer a question of if, but how long?
Meanwhile, the price war in the oil market between Saudi Arabia and Russia is adding unwelcome pressure on the global economy. Investors’ dash for cash has frozen the fixed income market. Policymakers are therefore fighting two battles. The first is to control the spread of the COVID-19 pandemic. There is no doubt that governments should prioritize saving lives, even if this hits economic activities. The second is to address such economic pains, as well as to restore liquidity in the financial markets. Both of these battles have already led to unprecedented measures from governments and central banks around the world.
The battle against COVID-19 will bring a severe recession
China’s economic data for January and February shows that industrial production, fixed asset investment and retail sales all contracted at a record pace due to the outbreak. Even as the economy is gradually returning to normal, a year-on-year GDP contraction in 1Q 2020 seems impossible to avoid. Its challenge has also shifted away from domestic demand and supply chain disruptions to a collapse in global demand.
In the U.S. and Europe, the outbreak has yet to show signs of peaking. Governments are imposing increasingly stringent measures to limit the spread of the virus. This includes lockdowns in cities, closings of borders and shops and restaurants are ordered to limit operations. This is hurting businesses and workers. Initial jobless claims in the U.S. hit 3.3 million people for the week ended March 21. This was almost five times higher than the worst week during the 2008/09 global financial crisis (GFC). The magnitude of the current global recession is likely to be unprecedented. The next question is the duration of this recession, which would be determined by the speed of containing this outbreak, including the development of faster and simpler tests and a vaccine.
2
The battle to keep financial markets functioning
The severity of this outbreak’s economic impact has been reflected by the markets. U.S. equities rapidly entered bear market territory, with the circuit breaker kicking in four times between March 9 and 18. Corporate credit spreads widened in fear of an economic recession and rising defaults. This was particularly painful in the energy sector given the collapse in oil prices. These are usual responses in risk assets during an economic downturn.
However, the dash for cash also meant that investors were rushing to sell their assets to raise cash, including U.S. Treasuries and other high-quality assets, such as mortgage-backed securities. This has led to a liquidity crunch in these markets and their prices fell alongside equities and corporate credits, breaking the traditional negative relationship between equities and governmentbonds. This also means businesses are finding it increasingly difficult to obtain cash flow to get through the tough periods ahead. This is where the Federal Reserve (Fed) and global central banks have few choices but to bring out the GFC toolbox.
Bringing out the bazooka and the kitchen sink
Central banks around the world have opted for aggressive rate cuts. The Fed cut policy rates by 150bps in two emergency meetings in March. It initially brought back USD750 billion worth of asset purchases. It later lifted the limit, also known as quantitative easing (QE) Infinity, given the huge daily purchases it engaged in. It has also re-introduced a number of GFC-era measures to ensure sufficient liquidity to have normal operations in the corporate debt market and money market fund industry. The European Central Bank has also removed the limit to buy from a specific issuing country. Meanwhile, central banks from the UK and Australia have cut their policy rates to record lows. The Reserve Bank of Australia has also introduced yield curve control to keep the 3-year Australia government bond yield at around 0.25%. The Bank of Japan has also expanded its corporate bond and equity exchange-traded fund purchases.
Governments around the world are also pushing out huge fiscal stimulus plans. The U.S. government has introduced a USD2 trillion fiscal package to direct cash to households, facilitate small business loans and provide financial support for hard-hit industries. Germany has finally abandoned its balance budget principle and looks to pass a EUR156 billion supplementary budget while setting up a EUR500 billion bailout fund for troubled companies. These policies, in general, aim to provide households with an income source when economic activities are suspended. They also help businesses to get through this period by providing analternative source of cash when income is severely impacted by the pandemic.
What to watch out for
The key in the near term is still the duration of this recession. We are starting to get data to give us a better idea on the depth of the economic impact, and the scale of fiscal and monetary support. However, if the pandemic is going to take longer to contain, or social distancing policies would be in place in coming months, instead of weeks, the economic costs will rise further and policymakers will need to introduce another round of stimulus packages. This also means economic and earnings recovery would be delayed.
Hence, we are still closely monitoring the number of infections in the U.S. and Europe, as well as the potential for a second round of infections in China and Asia. This calls for a more conservative asset allocation with concentration in assets that are directly supported by central banks, such as government bonds, high-quality corporate credits and asset-backed securities. Equities could still see more volatilities ahead as businesses are adjusting to the new environment. Policies, such as guidance on dividends and buybacks, may also impact how investors view equities in the near term.
MONTHLY MARKET REVIEW
MONTHLY MARKET REVIEW | APRIL 2020
3J.P. MORGAN ASSET MANAGEMENT
MONTHLY MARKET REVIEW | APRIL 2020
Global economy:
• The economic impact from the COVID-19 outbreak is starting to reflect on economic data. U.S. initial jobless claims hit 3.3 million people for the week ended March 21, versus 665k during the peak of the GFC. Purchasing Managers’ Index data, both manufacturing and services, are pointing toward a sharp recession in 2Q 2020 in the global economy. China, given it is at a later phase of the outbreak, is showing some signs of improvement as consumption and production gradually resume. (GTMA P. 7, 15)
• Governments and central banks around the world are applying aggressive monetary and fiscal policies to contain the fallout from the outbreak. The Fed has cut rates by 150bps in March and introduced unlimited asset purchases and a series of measures to supply financial markets with sufficient liquidity. The European Central Bank also opted for aggressive QE. The U.S. government has also launched a USD2 trillion fiscal stimulus package to support low income families and businesses. (GTMA P. 21, 22, 24, 32)
Equities:• The U.S. equity market entered bear market territory as
recession expectations increased. The S&P 500 lost 12.5% in the month, but it went to a multi-year low of 2,191, 35.4% below its all-time high set in mid-February. The circuit breaker was triggered four times, and the VIX index, reflecting market volatility, hit its all-time high of 82.7. Europe and Japan also went through sharp corrections. China’s A-share market has been relatively resilient given its capital control and early stabilization in the outbreak. (GTMA P. 34)
• Following the market correction, valuation is much less demanding around the world. Price-to-earnings (P/E) for the S&P 500 is back to its long-term average, and close to the low end of the 15-year range for Asian equities. However, the risk is for earnings to be revised lower, which means the current P/E ratios are making stocks look too cheap. The price-to-book (P/B) ratios are therefore another useful valuation measure. P/B ratios for Asian equities are also falling below their long-term averages, especially in South Korea, Hong Kong and ASEAN. This is a constructive signal for long-term investors. (GTMA P. 37, 38)
Fixed income:
• U.S. Treasury (UST) yields went through a volatile March. Risk aversion and recession concerns pushed 10-year UST yield to below 0.4%. However, the rush to raise cash has forced investors to sell UST, and this pushed yields higher. This also led the yield curve to steepen since the Fed has been aggressively injecting cash into the financial system, hence pushing short-term interest rates lower. (GTMA P. 50, 52)
• This dash for cash has hurt corporate bonds and emerging market (EM) fixed income. The U.S. high yield debt spread widened by 330bps on the back of the collapse of oil prices and the retail sector being hit by social distancing. The liquidity shortage also added fear toward high yield debt issuers unable to raise funding. The high grade corporate debt index also saw its credit spread widen by 98bps. A similar magnitude of spread widening has been observed in the EM debt market. This correction has put valuations of corporate debt and EM fixed income significantly below their long-term average. (GTMA P. 47, 49, 57, 58)
Other assets:
• Similar to fixed income, the surge in the demand for cash has pushed the U.S. dollar (USD) stronger. The USD index hit its multi-year high of 102, then fell back to sub-100 on the back of the Fed’s measures to provide liquidity to U.S. capital markets, as well as USD liquidity internationally. It re-established currency swap lines with 14 central banks around the world. It also created a repo operation, using UST as collaterals, with central banks and international organizations to provide USD. (GTMA P. 64, 65)
• The price of oil collapsed on the back of the price war between Saudi Arabia-led Organization of the Petroleum Exporting Countries and Russia. Saudi Arabia planned to expand output and provide discounts to buyers, as Russia reportedly refused to cut output further to control oil prices. Meanwhile, the looming global recession is dampening demand. Brent crude fell to its multi-year low of USD 22.7pb. This would be below the production costs of many producers and hence a supply cutback could be on the cards in the medium term. However, with the double whammy in weak demand and surging supply, oil prices are likely to stay low in the near term. (GTMA P. 67, 69)
4
China: Economic snapshot | 7GTM - Asia
7
-8%
-4%
0%
4%
8%
12%
16%
20%
'80 '85 '90 '95 '00 '05 '10 '15
2025303540455055606570
'07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20
-20%
-10%
0%
10%
20%
30%
40%
50%
'07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20
Contribution to real GDP growthYear-over-year change
Caixin/Markit Purchasing Managers’ IndicesLevel
Electricity consumptionYear-to-date, year-over-year change
Source: J.P. Morgan Asset Management; (Left) CEIC, National Bureau of Statistics of China; (Top right) Caixin/Markit, J.P. Morgan Economic Research; (Bottom right) CEIC, China Electricity Council.Guide to the Markets – Asia. Data reflect most recently available as of 31/03/20.
Net exports
Gross capital formation (investment)
Consumption
GDP
Secondary
Tertiary
2/2020: -3.1%
2/2020: -12%
Manufacturing
Services
2/2020: 26.52019: 6.1%
3/2020: 50.1
5
Global Purchasing Managers’ Index (PMI) | 15GTM - Asia
15 A
pr
'19
May '19
Ju
n '19
Ju
l '1
9
Au
g '19
Sep
'19
Oct
'19
No
v '19
Dec '19
Jan
'20
Feb
'20
Mar
'20
Global 47.1 47.6
DM* 49.5 46.0
EM** 44.6 49.1
U.S. (Markit) 50.7 48.5
U.S. (ISM) 50.1 49.1
Euro area 49.2 44.5
Germany 48.0 45.4
France 49.8 43.2
Italy 48.7 40.3
Spain 50.4 45.7
UK 51.7 47.8
Australia 50.2 49.7
Japan 47.8 44.8
China (Markit) 40.3 50.1
China (NBS) 35.7 52.0
Korea 48.7 44.2
Taiwan 49.9 50.4
Indonesia 51.9 45.3
India 54.5 51.8
Russia 48.2 47.5
Brazil 52.3 48.4
Mexico 50.0 47.9
# markets above 50 13 9 6 3 6 6 6 5 7 7 7 3
Source: Australian Industry Group, Institute for Supply Management, J.P. Morgan Economic Research, Markit, J.P. Morgan Asset Management.PMIs are relative to 50, which indicates deceleration (below 50) or acceleration (above 50) of the sector. Heatmap colors are based on PMI relative to the 50 level, with green (red) corresponding to acceleration (deceleration). *Developed market includes Australia, Canada, Denmark, Euro area, Japan, New Zealand, Norway, Sweden, Switzerland, UK and U.S. **Emerging market includes Brazil, Chile, China, Colombia, Croatia, Czech Republic, Hong Kong SAR, Hungary, India, Indonesia, Israel, Korea, Malaysia, Mexico, Philippines, Poland, Romania, Russia, Saudi Arabia, Singapore, South Africa, Taiwan, Thailand, Turkey and Vietnam. Japan December 2019 number is a flash estimate. Guide to the Markets – Asia. Data reflect most recently available as of 31/03/20.
Global manufacturing and services PMIIndex
Global manufacturing PMI breakdown
Manufacturing
Services
30
35
40
45
50
55
60
65
'99 '01 '03 '05 '07 '09 '11 '13 '15 '17 '19
6
Central bank policy rates | 21GTM - Asia
21
-200
-150
-100
-50
0
50
100
150
'06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 YTD'20
Source: J.P. Morgan Asset Management; (Left) FactSet; (Right) BIS. G4 are the Bank of England, the Bank of Japan (BoJ), the European Central Bank and the U.S. Federal Reserve. *Key deposit rates that central banks charge commercial banks on their excess reserves. **The BoJ has adopted a three-tier system in which a negative interest rate of -0.1% will be applied to the policy rate balance of the aggregate amount of all financial institutions that hold current accounts at the BoJ. ***Count covers the 38 central banks included in the Bank for International Settlements’ central bank policy monitor. Year-to-date data reflect most recently available as of 25/03/20. Past performance is not a reliable indicator of current and future results.Guide to the Markets – Asia. Data reflect most recently available as of 31/03/20.
Policy rateDeposit
rate*
Eurozone 0.0% -0.5%
Japan** -0.1 to 0.0% -0.1%
UK 0.1% 0.1%
U.S. 0.0 to 0.25% 0.1%
Changes in central bank policy ratesNumber of hikes or cuts***
G4 central bank key policy ratesPer annum
Developed markets
Emerging marketsRate hikes
Rate cutsDeveloped markets
Emerging markets
7
Central bank balance sheets | 22GTM - Asia
22
-1,000
0
1,000
2,000
3,000
4,000
5,000
6,000
'06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20
Source: Bank of England, Bank of Japan, Bloomberg Finance L.P., European Central Bank, U.S. Federal Reserve, J.P. Morgan Asset Management.*New purchases of bonds are based on period to period changes in average holdings during the quarter across various asset purchase programs as reported by each respective G4 central bank (the Bank of England, the Bank of Japan, the European Central Bank and the U.S. Federal Reserve), announced purchase plans of these central banks and J.P. Morgan Asset Management projections, converted to common currency by average monthly exchange rates. Guide to the Markets – Asia. Data reflect most recently available as of 31/03/20.
Central bank bond purchases 12-month rolling flow of bond purchases by G4 central banks*, USD billions
Projections
U.S.
Eurozone
Japan
Net
UK
8
Government debt and fiscal balance | 24GTM - Asia
24
Source: Bloomberg, European Commission AMECO forecasts, Government Budgets, International Monetary Fund - World Economic Outlook, J.P. Morgan Asset Management. Emerging and developed markets classification based on MSCI 2019 Annual Market Classification Review.Guide to the Markets – Asia. Data reflect most recently available as of 31/03/20.
Gross government debt and fiscal balance% of GDP, 2020 estimates
Fiscal Balance
Gro
ss g
ov
ern
men
t d
eb
t
IndonesiaTaiwan
PhilippinesAustralia
ThailandSouth Korea
GermanyMalaysiaChina
India
UK
CanadaSpain
France
U.S.Singapore
Italy
Japan
0%
50%
100%
150%
200%
250%
-9% -8% -7% -6% -5% -4% -3% -2% -1% 0% 1% 2%
Emerging Market
Developed Market
9
United States: Monetary policy | 32GTM - Asia
32
0.06% 0.11%
0%
1%
2%
3%
4%
5%
6%
'05 '07 '09 '11 '13 '15 '17 '19 '21
Source: Bloomberg Finance L.P., FactSet, U.S. Federal Reserve, J.P. Morgan Asset Management.Market expectations are the federal funds rates priced into the Fed Fund futures market as of 31/03/20.Guide to the Markets – Asia. Data reflect most recently available as of 31/03/20.
Federal funds rate expectationsMarket expectations for the fed funds rate
Federal funds rate
Market expectations on 31/03/20
Federal Reserve Policy Actions
Restarted unlimited asset purchase programs
Reduced reserve requirements for the banking sector
Expanded the asset purchase program to include commercial mortgage-backed securities
Restarted Term Asset-Backed Securities Loan Facility (TALF)
Launched a Primary (PMCCF) and Secondary Market Corporate Credit Facility (SMCCF)
Allowed municipal debt to be eligible as collateral in Money Market Fund Liquidity Facility (MMLF) and Commercial Paper Funding Facility (CPFF)
10
Global and Asia equity market returns | 34GTM - Asia
34
Source: FactSet, MSCI, Standard & Poor’s, J.P. Morgan Asset Management.Returns are total returns based on MSCI indices, except the U.S., which is the S&P 500, and China A, which is the CSI 300 index in U.S. dollar terms. China return is based on the MSCI China index. 10-yr total (gross) return data is used to calculate annualized returns (Ann. Ret.) and annualized volatility (Ann. Vol.) and reflect the period 31/03/10 – 31/03/20. Past performance is not a reliable indicator of current and future results. Guide to the Markets – Asia. Data reflect most recently available as of 31/03/20.
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 1Q '20 Ann. Ret. Ann. Vol.
India ASEAN U.S . India U.S . China A Ja pa n Ta iwa n China U.S . Ta iwa n China U.S . China A
10 2 .8 % 3 2 .4 % 2 .1% 2 6 .0 % 3 2 .4 % 5 2 .1% 9 .9 % 19 .6 % 5 4 .3 % - 4 .4 % 3 7 .7 % - 10 .2 % 10 .5 % 2 4 .5 %
China A Kore a ASEAN China Ja pa n India China A U.S . Kore a India China A China A Ta iwa n India
9 8 .5 % 2 7 .2 % - 6 .1% 2 3 .1% 2 7 .3 % 2 3 .9 % 2 .4 % 12 .0 % 4 7 .8 % - 7 .3 % 3 7 .2 % - 11.6 % 7 .3 % 2 2 .8 %
Ta iwa n Ta iwa n Europe ASEAN Europe U.S . U.S . Kore a India Ta iwa n U.S . Ja pa n China Kore a
8 0 .2 % 2 2 .7 % - 10 .5 % 2 2 .8 % 2 6 .0 % 13 .7 % 1.4 % 9 .2 % 3 8 .8 % - 8 .2 % 3 1.5 % - 16 .6 % 4 .6 % 2 0 .6 %
ASEAN India Kore aAPAC
e x- JPTa iwa n Ta iwa n Europe
APAC
e x- JP
APAC
e x- JPASEAN Europe Ta iwa n Ja pa n China
7 5 .0 % 2 0 .9 % - 11.8 % 2 2 .6 % 9 .8 % 10 .1% - 2 .3 % 7 .1% 3 7 .3 % - 8 .4 % 2 4 .6 % - 19 .0 % 4 .1% 2 0 .3 %
APAC
e x- JP
APAC
e x- JPJa pa n Kore a Kore a China India ASEAN China A Ja pa n China U.S .
APAC
e x- JPEurope
7 3 .7 % 18 .4 % - 14 .2 % 2 1.5 % 4 .2 % 8 .3 % - 6 .1% 6 .2 % 3 2 .6 % - 12 .6 % 2 3 .7 % - 19 .6 % 3 .5 % 17 .1%
Kore a Ja pa nAPAC
e x- JPEurope China ASEAN Kore a Ja pa n ASEAN
APAC
e x- JPJa pa n
APAC
e x- JPEurope
APAC
e x- JP
7 2 .1% 15 .6 % - 15 .4 % 19 .9 % 4 .0 % 6 .4 % - 6 .3 % 2 .7 % 3 0 .1% - 13 .7 % 2 0 .1% - 2 0 .7 % 3 .1% 16 .9 %
China U.S . China Ta iwa nAPAC
e x- JP
APAC
e x- JPChina China Ta iwa n Europe
APAC
e x- JPKore a China A Ta iwa n
6 2 .6 % 15 .1% - 18 .2 % 17 .7 % 3 .7 % 3 .1% - 7 .6 % 1.1% 2 8 .5 % - 14 .3 % 19 .5 % - 2 2 .4 % 2 .6 % 16 .9 %
Europe China Ta iwa n U.S . China A Ja pa nAPAC
e x- JPEurope Europe China Kore a Europe Kore a ASEAN
3 6 .8 % 4 .8 % - 2 0 .2 % 16 .0 % - 2 .6 % - 3 .7 % - 9 .1% 0 .2 % 2 6 .2 % - 18 .7 % 13 .1% - 2 4 .2 % 2 .6 % 16 .4 %
U.S . Europe China A China A India Europe Ta iwa n India Ja pa n Kore a ASEAN ASEAN ASEAN Ja pa n
2 6 .5 % 4 .5 % - 2 0 .5 % 10 .9 % - 3 .8 % - 5 .7 % - 11.0 % - 1.4 % 2 4 .4 % - 2 0 .5 % 8 .8 % - 3 0 .4 % 1.4 % 13 .5 %
Ja pa n China A India Ja pa n ASEAN Kore a ASEAN China A U.S . China A India India India U.S .
6 .4 % - 8 .4 % - 3 7 .2 % 8 .4 % - 4 .5 % - 10 .7 % - 18 .4 % - 15 .2 % 2 1.8 % - 2 7 .6 % 7 .6 % - 3 1.1% - 0 .4 % 13 .3 %
10-yrs ('10 - '20)
11
Global equities: Earnings expectations | 37GTM - Asia
37
Earnings growthEarnings per share, year-over-year change, consensus estimates
Source: IBES, MSCI, Standard & Poor’s, Thomson Reuters Datastream, J.P. Morgan Asset Management. Asia Pacific ex-Japan, EM, Europe and U.S. equity indices used are the MSCI Asia Pacific ex-Japan, MSCI Emerging Markets, MSCI Europe and S&P 500, respectively. *Initial 2020 earnings are 2020 earnings expectations as at 31/12/19. Consensus estimates used are calendar year estimates from IBES. Revisions are based on the current unreported year. Net earnings revisions is (number of companies with upward earnings revisions – number of companies with downward earnings revisions) / number of total companies. Past performance is not a reliable indicator of current and future results. Guide to the Markets – Asia. Data reflect most recently available as of 31/03/20.
Earnings revisions ratiosNet earnings revisions to consensus estimates, 13-week moving average
2018
Initial 2020*
2019
U.S.
Europe
Asia Pacific
ex-Japan
Japan
Current 2020
-60%
-40%
-20%
0%
20%
40%
60%
'13 '14 '15 '16 '17 '18 '19
24%
8%
5%
6%
2%
-1% -1%
-2%
9%
15%
13%
9%
3%
12%
10%
2%
-5%
0%
5%
10%
15%
20%
25%
30%
U.S. EM Asia Pacific ex-Japan
Europe
12
Global equities: Valuations | 38GTM - Asia
38
Source: Bloomberg Finance L.P., China Securities Index, FactSet, MSCI, Standard & Poor’s, J.P. Morgan Asset Management.Price-to-earnings (P/E) and price-to-book (P/B) ratios are in local currency terms. China A valuations based on the CSI 300 Index and use 10 years of data due to availability. China valuation is based on the MSCI China. 15-year range for P/E and P/B ratios are cut off to maintain a more reasonable scale for some indices. Past performance is not a reliable indicator of current and future results. Guide to the Markets – Asia. Data reflect most recently available as of 31/03/20.
Equity market valuations – Price to bookTrailing P/B ratios
Equity market valuations – Price to earningsForward P/E ratios
15-yr. average
Latest
15-yr. range38.3 35.8
15-yr. average
Latest
15-yr. range5.2 5.2
2.6
1.7 1.7 1.72.0
1.9
1.6 1.4
3.03.4
1.41.3
2.0
2.4
1.51.9
2.0
1.8
2.7
1.0
3.2
1.6 1.5 1.5 1.41.7
1.6
1.1
2.62.2
1.10.9
1.41.6
1.1
1.9 1.61.8 1.8
0.8
0x
1x
2x
3x
4x
5x
S&P 500 Europeex-UK
Asia Pacex-Japan
Emergingmarkets
ASEAN China A(CSI 300)
China HongKong
India Indonesia Japan Korea Malaysia Philippines Singapore Taiwan Thailand Brazil Mexico Russia
14.7
13.0
12.611.4
13.612.5 11.7
15.4 16.4
13.615.4
9.6
14.9 15.713.4 14.1
11.810.9
15.1
7.0
15.513.2
12.2 11.212.0 11.0 11.7
13.6 14.2
11.412.2
9.5
14.7
9.8 10.713.7
13.6
10.611.2
6.6
0x
10x
20x
30x
S&P 500 Europeex-UK
Asia Pacex-Japan
Emergingmarkets
ASEAN China A(CSI 300)
China HongKong
India Indonesia Japan Korea Malaysia Philippines Singapore Taiwan Thailand Brazil Mexico Russia
13
Global fixed income: Yields and returns | 47GTM - Asia
47
Source: Barclays, Bloomberg Finance L.P., FactSet, J.P. Morgan Economic Research, J.P. Morgan Asset Management. Based on Bloomberg Barclays U.S. Aggregate Credit – Corporate High Yield Index (U.S. Corporate HY), Bloomberg Barclays U.S. Aggregate Credit – Corporate Investment Grade Index (U.S. Corporate IG), J.P. Morgan Government Bond Index – EM Global (GBI-EM) (Local EMD), J.P. Morgan Emerging Market Bond Index Global (EMBIG) (USD EMD), J.P. Morgan Asia Credit Index (JACI) (USD Asian Bond), Bloomberg Barclays Pan European High Yield (Europe HY), J.P. Morgan Government Bond Index – Global Traded (DM Government Bond), J.P. Morgan Asia Credit High Yield Index (Asia HY), Bloomberg Barclays Global U.S. Treasury – Bills (3-5 years) (U.S. Treasury) and Bloomberg Barclays U.S. Treasury – Bills (1-3 months) (Cash). 5-year data is used to calculate annualized returns (Ann. Ret.). Returns are in U.S. dollars and reflect the period from 31/03/15 – 31/03/20. *Duration is a measure of the sensitivity of the price (the value of the principal) of a fixed income investment to a change in interest rates and is expressed as number of years. Rising interest rates mean falling bond prices, while declining interest rates mean rising bond prices. **Correlation to the MSCI AC World Index is a measure over 10 years of data. Positive yield does not imply positive return. Past performance is not a reliable indicator of current and future results.Guide to the Markets – Asia. Data reflect most recently available as of 31/03/20.
Global bond opportunities Fixed income sector returns
Sector YTMDuration*
(years)
Correl. to
MSCI AC
World**
Correl. to
10-year
UST
Asia HY 10.1% 4.2 0.68 -0.08
U.S. HY 9.5% 4.1 0.82 -0.25
Europe HY 7.7% 3.9 0.82 -0.34
USD EMD 6.5% 7.4 0.61 0.11
Local EMD 5.8% 4.8 0.68 -0.10
USD Asian 4.9% 5.2 0.54 0.24
U.S. IG 3.4% 8.0 0.31 0.49
DM Gov't 0.6% 8.7 0.13 0.57
U.S. Treasury 0.6% 7.0 -0.46 0.98
Cash 0.1% 0.2 -0.08 0.11
5-yrs
2014 2015 2016 2017 2018 2019 1Q '20 Ann. Ret.
USD
Asia nAsia HY U.S . HY
Europe
HYCa sh U.S . IG
U.S .
Tre a s
USD
Asia n
8 .3 % 5 .2 % 17 .1% 2 1.0 % 1.8 % 14 .5 % 8 .2 % 3 .7 %
U.S . IGUSD
Asia n
Loc a l
EMD
Loc a l
EMD
U.S .
Tre a s
USD
EMD
DM
Gov't
U.S .
Tre a s
7 .5 % 2 .8 % 11.4 % 15 .4 % 0 .9 % 14 .4 % 3 .1% 3 .6 %
Asia HYUSD
EMDAsia HY
USD
EMD
DM
Gov'tU.S . HY Ca sh U.S . IG
6 .1% 1.2 % 11.2 % 9 .3 % - 0 .7 % 14 .3 % 0 .5 % 3 .4 %
USD
EMD
U.S .
Tre a s
USD
EMDU.S . HY
USD
Asia n
Loc a l
EMD
USD
Asia nAsia HY
5 .5 % 0 .8 % 10 .2 % 7 .5 % - 0 .8 % 13 .1% - 3 .6 % 3 .3 %
U.S .
Tre a sCa sh U.S . IG Asia HY U.S . HY Asia HY U.S . IG
DM
Gov't
5 .1% 0 .0 % 6 .1% 6 .9 % - 2 .1% 12 .8 % - 3 .6 % 3 .2 %
U.S . HY U.S . IGUSD
Asia n
DM
Gov'tU.S . IG
USD
Asia n
USD
EMD
USD
EMD
2 .5 % - 0 .7 % 5 .8 % 6 .8 % - 2 .5 % 11.3 % - 11.8 % 2 .8 %
DM
Gov't
DM
Gov't
Europe
HYU.S . IG Asia HY
Europe
HYAsia HY U.S . HY
0 .7 % - 2 .6 % 3 .4 % 6 .4 % - 3 .2 % 10 .3 % - 12 .0 % 2 .8 %
Ca sh U.S . HYDM
Gov't
USD
Asia n
USD
EMD
U.S .
Tre a sU.S . HY Ca sh
0 .0 % - 4 .5 % 1.6 % 5 .8 % - 4 .6 % 6 .9 % - 12 .7 % 1.1%
Europe
HY
Europe
HY
U.S .
Tre a s
U.S .
Tre a s
Loc a l
EMD
DM
Gov't
Loc a l
EMD
Europe
HY
- 6 .0 % - 7 .6 % 1.0 % 2 .3 % - 6 .7 % 6 .0 % - 16 .1% 0 .9 %
Loc a l
EMD
Loc a l
EMDCa sh Ca sh
Europe
HYCa sh
Europe
HY
Loc a l
EMD
- 6 .1% - 18 .0 % 0 .3 % 0 .8 % - 8 .2 % 2 .2 % - 17 .0 % - 0 .1%
14
Global fixed income: Valuations | 49GTM - Asia
49
Source: iBoxx, ICE BofA Merrill Lynch, J.P. Morgan Economics Research, J.P. Morgan Asset Management.Based on J.P. Morgan Domestic High Yield Index (U.S. high yield), J.P. Morgan U.S. Liquid Index (JULI) (U.S. investment grade), J.P. Morgan Euro High Yield Index (Euro high yield), iBoxx EUR corporates (Euro investment grade), J.P. Morgan Asia Credit Index (JACI) (USD Asia credit), J.P. Morgan Asia Credit China Index (USD China offshore credit), J.P. Morgan Asia Credit High Yield Index (USD Asia high yield), J.P. Morgan EMBI Global (EMD USD), J.P. Morgan Corporate Emerging Markets Bond Index – CEMBI (EMD USD corporates), J.P. Morgan GBI-EM Global (Local EMD). Positive yield does not imply positive return. Past performance is not a reliable indicator of current and future results.Guide to the Markets – Asia. Data reflect most recently available as of 31/03/20.
Spread to worst across fixed income sub-sectorsBasis points, last ten years
10-yr. average
Latest
10-yr. range
541
166
512
112
236
329
458
352330
475
949
292
901
202
399 385
1,007
577545
498
365
111
299
43
157 159
274 263217
329
0
200
400
600
800
1,000
1,200
U.S. highyield
U.S.investment
grade
Euro highyield
Euroinvestment
grade
USDAsiacredit
USD Chinaoffshore credit
USD Asiahigh yield
USD EMD USD EMDcorporates
Local EMD
15
Global fixed income: Bond yields and returns | 50GTM - Asia
50
0%
2%
4%
6%
8%
10%
12%
14%
16%
'63 '68 '73 '78 '83 '88 '93 '98 '03 '08 '13 '18
Source: FactSet, J.P. Morgan Asset Management; (Left) Tullet Prebon; (Right) U.S. Federal Reserve.*Data begins, and averages calculated from, 01/01/70 for U.S. Treasuries, 02/10/72 for German Bunds and 03/02/86 for Japanese Government Bonds. Past performance is not a reliable indicator of current and future results. Guide to the Markets – Asia. Data reflect most recently available as of 31/03/20.
10-year government bond yields 10-year Treasury yields and subsequent returns
Average
since 1970* Latest
U.S. 6.3% 0.7%
Germany 5.4% -0.5%
Japan 2.3% 0.0%
10-year Treasury yield
10-year avg. ann. return
16
Global fixed income: Yields and risks | 52GTM - Asia
52
2y UST
10y USTTIPS
Japan (1-10y)
Germany (1-10y)France (1-10y)
UK (1-10y)
U.S. Aggregate
U.S. IG
U.S. HY
U.S. Floating RateU.S. MBS
Europe HY
Local EMD USD EMD
USD Asia Credit
USD Asia HY
USD EMD corporates
Local Asia
USD China offshore credit
-1%
0%
1%
2%
3%
4%
5%
6%
7%
8%
-0.5 -0.4 -0.3 -0.2 -0.1 0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9
Yie
ld t
o m
atu
rity
(12
-mo
nth
av
era
ge)
Correlation to MSCI AC World*
Source: Barclays, Bloomberg Finance L.P., FactSet, ICE BofA Merrill Lynch, J.P. Morgan Economics Research, MSCI, J.P. Morgan Asset Management. Based on Bloomberg Barclays U.S. Treasury (UST) Bellwether 2y & 10y (2y & 10y UST), Bloomberg Barclays Treasury Inflation-Protected Securities (TIPS), ICE BofAML Country Government (1-10y) (France, Germany, Japan & UK (1-10y)), Bloomberg Barclays U.S. Aggregate, Credit – Investment Grade & High Yield (U.S. Aggregate, IG & HY), Bloomberg Barclays U.S. Floating Rate (U.S. Floating Rate), Bloomberg Barclays U.S. Aggregate Securitized – Mortgage-Backed Securities (U.S. MBS), Bloomberg Barclays Pan-European High Yield (Europe HY), J.P. Morgan GBI-EM Global (Local EMD), J.P. Morgan EMBI Global (USD EMD), J.P. Morgan Asia Credit (JACI) (USD Asia Credit), J.P. Morgan Asia Credit (JACI) – High Yield (USD Asia HY), J.P. Morgan Asia Credit China Index (USD China offshore credit), J.P. Morgan CEMBI (USD EM Corporate Credit), J.P. Morgan Asia Diversified (JADE) (Local Asia). *Correlations are based on 10-years of monthly returns. Guide to the Markets – Asia. Data reflect most recently available as of 31/03/20.
Yields and correlations of fixed income returns to equities Yield, 10-year correlation between monthly total returns
Government
Credit
Emerging Market
Higher yielding
sectors
Stronger correlation
to equities
Government & Credit
17
U.S. securitized assets | 57GTM - Asia
57
Source: FactSet, J.P. Morgan Asset Management; (Top left) Barclays, Bloomberg Finance L.P.; (Bottom left and right) Federal Reserve Bank of New York.*Asset-backed securities as represented by the Bloomberg Barclays U.S. Aggregate Securitized ABS Index. MBS are Mortgage Backed Securities, CMBS are Commercial Mortgage Backed Securities, ABS are Asset Backed Securities. **Delinquency rate is defined as loans at least 90 days late or more with payments.***Sectors not shown but included in the total figure are Revolving Home Equity and Others. Latest data are as of 4Q19. ****Credit scores measure creditworthiness or likelihood of repayment of a borrower. The higher the score, the less risk of default. Scores less than 670 are considered subprime. Latest data are as of 4Q19.Guide to the Markets – Asia. Data reflect most recently available as of 31/03/20.
Consumer sector delinquency**
Mortgage originations by credit score****USD billions
Asset-backed security* breakdown
Total debt balance
(USD trillion)***
Student 1.51
Credit Card 0.93
Auto 1.33
Mortgage 9.56
Total 14.15
< 620
620 - 659 720 - 759
760+
660 - 719
0
200
400
600
800
1000
1200
'03 '05 '07 '09 '11 '13 '15 '17 '19
Agency fixed rate
MBS, 91.3%
Non-agency CMBS, 4.3%
Agency CMBS, 2.9%
ABS, 7.2%
18
U.S. high yield bonds | 58GTM - Asia
58
0
400
800
1,200
1,600
2,000
0%
4%
8%
12%
16%
20%
'90 '95 '00 '05 '10 '15 '20
Last twelve month sector default ratesSectors with highest index weights
Source: J.P. Morgan Economics Research, J.P. Morgan Asset Management.*Default rate is defined as the percentage of the total market trading at or below 50% of par value and includes any Chapter 11 filing, pre-packaged filing or missed interest payments. Spreads indicated are benchmark yield-to-worst less comparable maturity Treasury yields. **Data reflects 20-yr average and is as of 31/12/19. ***EBITDA is earnings before interest, tax, depreciation and amortisation. U.S. corporate high yield is represented by the J.P. Morgan Domestic High Yield Index.Guide to the Markets – Asia. Data reflect most recently available as of 31/03/20.
High yield leverageEBITDA*** / interest expense Debt/EBITDA
High yield spread and default rate*
Default rate Spread to worst (basis points)
10-yr average Latest
HY spread to worst 541bps 949bps
HY energy spread to worst 641bps 2137bps
HY default rate 1.9% 3.4%
HY ex-energy default rate 3.0%** 2.4%
Recessions
Interest coverage Leverage
Default rate
Index weight
3.5
4.0
4.5
5.0
5.5
3.0
3.5
4.0
4.5
5.0
5.5
'08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19
11.4%
8.7%
7.4% 7.2% 7.1%6.1%
1.0%
2.6%1.7%
1.2%
5.3%
2.7%
0%
2%
4%
6%
8%
10%
12%
Healthcare Energy Technology Services Financial GamingLodging And
Leisure
19
U.S. dollar | 64GTM - Asia
64
60
70
80
90
100
110
120
130
140
'86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20
Source: Bloomberg Finance L.P., FactSet, U.S. Federal Reserve, J.P. Morgan Asset Management.*The real broad trade-weighted exchange rate index is the weighted average of a market’s currency relative to a basket of trading partners’ currencies adjusted for the effects of inflation. The weights are determined by comparing the relative trade balances, in terms of one market’s currency, with other markets within the basket. **The U.S. dollar index shown here is a nominal trade-weighted index of major trading partners’ currencies. Major currencies are: British pound, Canadian dollar, euro, Japanese yen, Swedish kroner and Swiss franc. Past performance is not a reliable indicator of current and future results.Guide to the Markets – Asia. Data reflect most recently available as of 31/03/20.
U.S. dollar performanceIndex, Jan. 2006 =100
U.S. dollar index**
Real trade-weighted exchange rate index (REER)*
3/2020: 99.053/2020: 111.89
Recession periods
20
Currencies | 65GTM - Asia
65
Source: FactSet, J.P. Morgan Economic Research, J.P. Morgan Asset Management.*The real trade-weighted exchange rate index is the weighted average of a market’s currency relative to a basket of other major currencies adjusted for the effects of inflation. The weights are determined by comparing the relative trade balances, in terms of one market’s currency, with other markets within the basket. Past performance is not a reliable indicator of current and future results.Guide to the Markets – Asia. Data reflect most recently available as of 31/03/20.
Currency deviation from 10-year average in real effective exchange rate* termsNumber of standard deviations away from average
FX above
long-term
average
FX below
long-term
average
Current
Max
Min
-2.0-1.9 -1.8
-1.8 -1.7
-1.3 -1.3 -1.2-1.0 -1.0
-0.7-0.5 -0.4
0.5
1.2 1.31.5 1.7
1.0
-4
-2
0
2
4
21
Commodities | 67GTM - Asia
67
-4 -2 0 2 4
Commodity Index
Oil
Natural Gas
Agriculture
Industrial Metals
Precious Metals
Gold
Example
Source: Bloomberg Finance L.P., FactSet, J.P. Morgan Asset Management; (Left) CME; (Right) Barclays, J.P. Morgan Economic Research, MSCI. Commodities are represented by the appropriate Bloomberg Commodity sub-index priced in U.S. dollars. Crude oil shown is West Texas Intermediate (WTI) crude. Other commodity prices are represented by futures contracts. Z-scores are calculated using daily prices over the past five years. Based on Bloomberg Commodity Index (Comdty.); MSCI ACWI Select – Energy Producers IMI, Metals & Mining Producers ex Gold & Silver IMI, Gold Miners IMI, Agriculture Producers IMI (Energy (E), M&M (E), Gold (E), Agri. (E)); Bloomberg Barclays Global Aggregate Credit – Corporate Energy Index (Energy (FI)); Bloomberg Barclays U.S. Aggregate Credit – Corporate High Yield Metals & Mining Index (U.S. M&M (FI)); Bloomberg Barclays Euro Aggregate Credit – Corporate Metals & Mining Index (Euro M&M (FI)); J.P. Morgan Emerging Market Corporate Credit – Corporate Metals & Mining Index (EM M&M (FI)).5-year total return data is used to calculate annualized returns (Ann. Ret.) and 5-year price return data is used to calculate annualized volatility (Ann. Vol.) and reflects the period 31/03/15 – 31/03/20. Past performance is not a reliable indicator of current and future results. Guide to the Markets – Asia. Data reflect most recently available as of 31/03/20.
Commodity pricesCommodity price z-scores for the past five years, USD per unit
Returns
High level
Current
Low level
$1.6
$20
$1,643
$37
$1.6 $4.8
$76
$1,677
$64$35
$1,050
$20
$144$84
$93
$203$144
$184
$105$59
$62
2015 2016 2017 2018 2019 1Q '20 Ann. Ret. Ann. Vol.
Ene rgy
(FI)Gold (E) M&M (E)
Euro M&M
(FI)Gold (E)
Euro M&M
(FI)Gold (E) Gold (E)
- 7 .3 % 6 2 .9 % 3 7 .5 % - 0 .9 % 5 1.1% - 9 .2 % 7 .0 % 3 5 .4 %
EM M&M
(FI)M&M (E) Agri. (E)
US M&M
(FI)M&M (E)
US M&M
(FI)
EM M&M
(FI)M&M (E)
- 10 .9 % 5 7 .8 % 2 0 .3 % - 3 .5 % 17 .1% - 11.9 % 4 .1% 2 9 .6 %
Agri. (E)US M&M
(FI)
EM M&M
(FI)
Ene rgy
(FI)
EM M&M
(FI)
EM M&M
(FI)
US M&M
(FI)Ene rgy (E)
- 13 .7 % 4 5 .5 % 14 .7 % - 3 .7 % 16 .5 % - 16 .1% 3 .4 % 2 6 .9 %
Euro M&M
(FI)
EM M&M
(FI)
US M&M
(FI)
EM M&M
(FI)
US M&M
(FI)
Ene rgy
(FI)
Ene rgy
(FI)Comdty.
- 16 .1% 3 2 .4 % 9 .9 % - 4 .1% 14 .0 % - 16 .2 % 0 .4 % 16 .0 %
Ene rgy (E) Ene rgy (E) Gold (E) Agri. (E) Agri. (E) Gold (E)Euro M&M
(FI)Agri. (E)
- 2 0 .6 % 2 9 .2 % 9 .4 % - 8 .9 % 13 .8 % - 19 .2 % - 0 .1% 15 .9 %
US M&M
(FI)
Euro M&M
(FI)Ene rgy (E) Comdty.
Ene rgy
(FI)Comdty. Agri. (E)
US M&M
(FI)
- 2 3 .7 % 2 1.9 % 9 .1% - 11.2 % 13 .4 % - 2 3 .3 % - 0 .8 % 14 .5 %
Comdty. Agri. (E)Ene rgy
(FI)Ene rgy (E) Ene rgy (E) Agri. (E) M&M (E)
EM M&M
(FI)
- 2 4 .7 % 15 .7 % 9 .0 % - 11.4 % 9 .5 % - 2 4 .3 % - 3 .1% 13 .1%
Gold (E) Comdty.Euro M&M
(FI)Gold (E) Comdty. M&M (E) Comdty.
Ene rgy
(FI)
- 2 6 .3 % 11.8 % 3 .9 % - 13 .0 % 7 .7 % - 3 5 .6 % - 7 .8 % 9 .6 %
M&M (E)Ene rgy
(FI)Comdty. M&M (E)
Euro M&M
(FI)Ene rgy (E) Ene rgy (E)
Euro M&M
(FI)
- 4 0 .1% 11.1% 1.7 % - 17 .8 % 5 .2 % - 4 5 .0 % - 9 .1% 9 .5 %
2015 - 2020
22
Oil: Short-term market dynamics | 69GTM - Asia
69
U.S. oil inventory and rig count* Number of rigs Billion barrels
Source: FactSet, J.P. Morgan Asset Management; (Top right) Baker Hughes, U.S. Department of Energy; (Bottom right) J.P. Morgan EM Macro bites, J.P. Morgan Securities. *Weekly U.S. crude oil and petroleum ending inventory includes strategic petroleum reserve, and active rig count represents both natural gas and oil rigs. Past performance is not a reliable indicator of current and future results.Guide to the Markets – Asia. Data reflect most recently available as of 31/03/20.
Price of oilBrent crude, USD / bbl
Fiscal breakeven oil priceUSD / bbl, 2020 estimates
Rig count U.S. oil inventory
$45$51 $54
$61 $61
$74
$115
$0
$20
$40
$60
$80
$100
$120
Qatar Russia Kuwait Iraq UAE SaudiArabia
Nigeria
03/2020: $22.70
07/2008: $145.65
12/2008:
$34.27
06/2014: $115.06
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