The opinions and views expressed here are those held by the author at the date of publication which are subject to change and are not to be taken as or construed as investment advice.

Quarterly Perspectives Asia | 2Q 2020

J.P. Morgan Asset Management is pleased to present the latest edition of Quarterly Perspectives. This piece explores key themes from our Guide to the Markets, providing timely economic and investment insights.

THIS QUARTER’S THEMES

1. A tough test for global economic resilience

2. Asset allocation to weather the COVID-19 storm

STRATEGISTS

Tai HuiManaging DirectorChief Market Strategist Asia

Yoshinori ShigemiManaging Director Global Market Strategist

Kerry Craig, CFAExecutive DirectorGlobal Market Strategist

Dr. Jasslyn Yeo, CFAExecutive DirectorGlobal Market Strategist

Marcella ChowVice PresidentGlobal Market Strategist

Ian HuiVice PresidentGlobal Market Strategist

Agnes LinVice PresidentGlobal Market Strategist

Shogo MaekawaVice PresidentGlobal Market Strategist

Chaoping Zhu, CFAVice PresidentGlobal Market Strategist

The opinions and views expressed here are those held by the author at the date of publication which are subject to change and are not to be taken as or construed as investment advice.

1 | QUARTERLY PERSPECTIVES

• As COVID-19 spreads across continents, market volatility could continue to spike, correlating with the number of new infections. A well-diversified portfolio is crucial.

• The focus of developed market and Asian central banks toward supporting growth suggests cash returns will drift lower, and the hunt for yield and income opportunities could intensify. Yield generation will likely become more challenging, and price fluctuations of selected bonds are now a key concern for investors.

• Equities, especially in Asia, still offer investors long-term opportunities, particularly as the global economy gradually recovers later in the year. Any rebound in exports could support corporate earnings in Asia. COVID-19 may also bring new investment themes as consumers’ spending habits change.

• The spread of coronavirus disease 2019 (COVID-19) across continents is likely to severely damage global growth in 1H 2020. The U.S. and Europe are expected to face a sharp growth contraction in the months ahead due to social distancing measures, even as economic activity in China resumes gradually in 2Q 2020. Recovery in the U.S. and Europe will be determined by how the pandemic is contained and the policy response to mitigate the economic fallout.

• Central banks have acted swiftly. This reinforces our view that monetary authorities are focused on protecting growth, while willing to tolerate inflation risks. Policy rates around the world are likely to drift lower in the medium term.

• An eventual rebound later in the year could be positive for the global trade cycle, benefitting Asia.

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NS • As investors gauge the economic impact on consumption and manufacturing

disruptions, they are likely to adopt a more defensive bias in asset allocation. This is especially true if governments are not able to produce a credible plan to offset the fallout.

• Yet, DM government bond yields are now depressed by aggressive monetary easing. Hence, the fixed income allocation should consist of high-quality corporate debt.

• We remain constructive in Asian equities in the medium to long term because of the room for stimulus by their governments and central banks. Moreover, there is a broader choice of high-dividend opportunities in this region when steady income flow is highly valued.

• Investors are facing short-term uncertainties arising from the global economic fallout of COVID-19. Global growth may worsen before improving, and risk aversion could persist. Diversification among asset classes has worked to reduce portfolio volatility.

• Aggressive monetary easing is making developed market (DM) government bonds less appealing, and this could benefit other fixed income sectors, such as asset-backed securities (ABS) and emerging market (EM) debt in the medium term.

• High-dividend equities is another option for investors who want to generate consistent income in this falling-yield environment.

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A tough test for global economic resilience

GLOBAL PURCHASING MANAGERS’ INDEX (PMI) – GTMA slide 15

CENTRAL BANK POLICY RATES – GTMA slide 21

GLOBAL TRADE – GTMA slide 18

Asset allocation to weather the COVID-19 storm

THE BENEFITS OF DIVERSIFICATION AND LONG-TERM INVESTING – GTMA slide 77

GLOBAL FIXED INCOME: YIELDS AND RISKS – GTMA slide 52

GLOBAL EQUITIES: HIGH DIVIDEND – GTMA slide 39

The opinions and views expressed here are those held by the author at the date of publication which are subject to change and are not to be taken as or construed as investment advice.

J.P. MORGAN ASSET MANAGEMENT | 2

OVERVIEW• The spread of coronavirus disease 2019 (COVID-19) across continents is likely to severely damage global growth in 1H 2020.

The U.S. and Europe are expected to face a sharp growth contraction in the months ahead due to social distancing measures, even as economic activity in China resumes gradually in 2Q 2020. Recovery in the U.S. and Europe will be determined by how the pandemic is contained and the policy response to mitigate the economic fallout.

• Central banks have acted swiftly. This reinforces our view that monetary authorities are focused on protecting growth, while willing to tolerate inflation risks. Policy rates around the world are likely to drift lower in the medium term.

• An eventual rebound later in the year could be positive for the global trade cycle, benefitting Asia.

INVESTMENT IMPLICATIONS• As COVID-19 spreads across continents, market volatility could continue to spike, correlating with the number of new

infections. A well-diversified portfolio is crucial.

• The focus of developed market and Asian central banks toward supporting growth suggests cash returns will drift lower, and the hunt for yield and income opportunities could intensify. Yield generation will likely become more challenging, and price fluctuations of selected bonds are now a key concern for investors.

• Equities, especially in Asia, still offer investors long-term opportunities, particularly as the global economy gradually recovers later in the year. Any rebound in exports could support corporate earnings in Asia. COVID-19 may also bring new investment themes as consumers’ spending habits change.

A tough test for global economic resilience

The opinions and views expressed here are those held by the author at the date of publication which are subject to change and are not to be taken as or construed as investment advice.

3 | QUARTERLY PERSPECTIVES

A balancing act of social distancing and recession risk

• COVID-19 has hurt China’s consumption and manufacturing production. It is already causing significant damage to the service sector in the U.S. and Europe due to social distancing policies.

• China’s manufacturing and service sectors both stalled, as reflected by the Purchasing Managers’ Index (PMI). The good news is that China is slowly recovering as the number of new infections decline and production resumes gradually.

• The U.S. and Europe are expected to face severe contraction in the months ahead due to sharp cutbacks in consumption and investment. The recovery will be driven by policy measures to support businesses and low-income families.

• This heatmap shows the change in the manufacturing PMI of key economies. This headline number is compiled from a business survey covering production, orders, costs, inventory, delivery time and employment. A reading above 50 shows manufacturing activity is expanding.

• The latest numbers reflect the significant economic impact on manufacturing because of factory shutdowns, especially in China. We do expect these numbers may improve once COVID-19 is contained.

The opinions and views expressed here are those held by the author at the date of publication which are subject to change and are not to be taken as or construed as investment advice.

J.P. MORGAN ASSET MANAGEMENT | 4

• The right chart shows central banks in both developed and emerging markets focused on rate cuts in 2019. The pivot by the Fed earlier in 2019 created the space needed for other central banks to cut rates.

• COVID-19 has pushed global central banks into action, prompting them to further cut rates instead of hitting a pause and being patient.

Central banks and governments to the rescue?

• Central banks globally have already implemented aggressive policies, such as asset purchases and liquidity injections, to help offset the economic fallout of COVID-19 and restore financial stability. Many governments have also implemented sizeable stimulus packages to support businesses and low-income families.

• China has cut policy rates by 10 basis points (bps) since the outbreak began. More importantly, the country has offered short-term refinancing of business loans, as well as waiving taxes, government fees and rents to help keep businesses, especially small and medium enterprises, going.

• The U.S. Federal Reserve (Fed) took the lead with a surprise 50bps cut on March 3, and this was followed by another emergency 100bps cut on March 16. It has also expanded various facilities in order to ensure financial system stability.

• Overall, this reinforces our view that policy rates in the long run are likely to remain low.

The opinions and views expressed here are those held by the author at the date of publication which are subject to change and are not to be taken as or construed as investment advice.

5 | QUARTERLY PERSPECTIVES

What could drive a recovery in the second half?

• While COVID-19 continues to evolve, we still expect a gradual global economic recovery in late 2020, taking into account China’s experience in disease containment and policy stimulus from governments and central banks.

• The technology hardware cycle was on the cusp of an upturn, feeding into the 5G technology adoption cycle. A resumption of this up cycle should benefit Asia’s technology producers such as Japan, South Korea and Taiwan.

• The strength of a global economic rebound will be determined by the duration of the pandemic and the policies supporting businesses and low-income families.

• The low-yield environment should also support corporate balance sheets. Reduced political uncertainties from trade tensions and U.S. elections in November should facilitate a rebound in corporate investment.

• The left chart shows the growth in global trade volume, with new export orders from global manufacturing PMI as a leading indicator. The right chart shows the share of exports to gross domestic product for key economies, as well as their top export destinations.

• The near-term outlook for global trade is challenging due to weaker global demand and production disruptions in China. Yet, this should gradually recover as COVID-19 is contained and consumer activity and production return to normal.

The opinions and views expressed here are those held by the author at the date of publication which are subject to change and are not to be taken as or construed as investment advice.

J.P. MORGAN ASSET MANAGEMENT | 6

OVERVIEW• Investors are facing short-term uncertainties arising from the global economic fallout of COVID-19. Global growth may worsen

before improving, and risk aversion could persist. Diversification among asset classes has worked to reduce portfolio volatility.

• Aggressive monetary easing is making developed market (DM) government bonds less appealing, and this could benefit other fixed income sectors, such as asset-backed securities (ABS) and emerging market (EM) debt in the medium term.

• High-dividend equities is another option for investors who want to generate consistent income in this falling-yield environment.

INVESTMENT IMPLICATIONS• As investors gauge the economic impact on consumption and manufacturing disruptions, they are likely to adopt a more

defensive bias in asset allocation. This is especially true if governments are not able to produce a credible plan to offset thefallout.

• Yet, DM government bond yields are now depressed by aggressive monetary easing. Hence, the fixed income allocation should consist of high-quality corporate debt.

• We remain constructive in Asian equities in the medium to long term because of the room for stimulus by their governments and central banks. Moreover, there is a broader choice of high-dividend opportunities in this region when steady income flow is highly valued.

Asset allocation to weather the COVID-19 storm

The opinions and views expressed here are those held by the author at the date of publication which are subject to change and are not to be taken as or construed as investment advice.

7 | QUARTERLY PERSPECTIVES

Diversification is key to containing portfolio volatility

• Amid uncertainties over the extent of COVID-19’s economic damage, investors are likely to stay defensive until the outbreak is contained, or until there is credible policy to support the global economy.

• During the recent stock market sell-off, the negative correlation between equities and fixed income temporarily broke down due to a liquidity squeeze. We expect this relationship to resume once liquidity in the fixed income market normalizes.

• The market signals to turn more positive toward risk include the stabilization of new confirmed cases in the U.S. and Europe or credible fiscal plans to support the economy and tackle the challenges businesses are facing.

• The top chart shows the correlation between equities and government bonds in the U.S. and developed economies. In most cases, the relationship is negative, which implies equity and bond prices typically move in opposite directions. This relationship underpins the principle of diversification.

• The bottom chart is an example of how a balanced portfolio can deliver return higher than a pure bond strategy, but with lower volatility than a pure equity strategy.

The opinions and views expressed here are those held by the author at the date of publication which are subject to change and are not to be taken as or construed as investment advice.

J.P. MORGAN ASSET MANAGEMENT | 8

• This chart shows the trade-off between yield-to-maturity of various fixed income assets and their correlation with equities. • To benefit from diversification, investors should choose assets on the left of the vertical axis. However, as yields continue to

fall for DM government bonds, mortgage-backed securities (MBS) or investment-grade (IG) corporates could be more feasible options.

What to do with the sub-1% 10-year U.S. Treasury (UST) yield?

• The Fed’s emergency rate cuts have pushed the 10-year UST yield to an all-time low. With lower income, diversifying with government bonds has become less appealing.

• With lower government bond yields, investors may look toward high-quality corporate credit or ABS, as the Fed and other central banks are active in ensuring the smooth functioning of these markets.

• A dovish Fed would allow Asian and EM central banks to cut rates. This could benefit EM debt in the medium term, especially sovereign bonds with high carry and high-quality corporate.

• Valuations in corporate credit and ABS have declined and this would benefit long-term investors who are looking to build an income-focused portfolio for the long run.

The opinions and views expressed here are those held by the author at the date of publication which are subject to change and are not to be taken as or construed as investment advice.

9 | QUARTERLY PERSPECTIVES

Stay with high-dividend equities while waiting for the storm to blow over

• Earnings downgrades and valuation de-rating are still likely in the near term with COVID-19 spreading across the U.S. and Europe. Investors should look toward Asian high-dividend equities.

• Asian governments and central banks have more room for economic stimulus, and they have been using fiscal policy to support businesses during the outbreak.

• High-dividend strategy is likely to be appreciated in a falling-yield environment. Asia Pacific (ex-Japan) has a broad variety of companies offering 3% or more in dividends, both in growth and defensive sectors.

• When the world economy recovers from COVID-19, we expect the rebound in the global trade cycle to resume. Asian corporate earnings should benefit given its high correlation with Asia’s export growth.

• The bottom left chart shows the return-volatility relationship between the high-dividend stock index and the main index for the World and APAC ex-Japan. The high-dividend strategy has been able to deliver similar return with lower volatility.

• The bottom right chart shows there are a large number of companies in Asia to choose from that have dividend yields of 3% or higher. In Asia, these companies are also distributed across a broad spectrum of industries, both in growth and defensive sectors.

The opinions and views expressed here are those held by the author at the date of publication which are subject to change and are not to be taken as or construed as investment advice.

10 | QUARTERLY PERSPECTIVES

GLOBAL MARKET INSIGHTS STRATEGY TEAM

Vincent JuvynsLuxembourg

Tilmann Galler, CFAFrankfurt

Maria Paola ToschiMilan

Shogo MaekawaTokyo

Lucia Gutierrez MelladoMadrid

Tai HuiHong Kong

Marcella ChowHong Kong

Max McKechnieLondon

Yoshinori ShigemiTokyo

Kerry Craig, CFAMelbourne

Dr. Jasslyn Yeo, CFASingapore

Karen WardLondon

Ambrose Crofton, CFALondon

Chaoping Zhu, CFAShanghai

Jai Malhi, CFALondon

Manuel Arroyo Ozores, CFAMadrid

Agnes LinTaipei

Michael Bell, CFALondon

Alex Dryden, CFANew York

Samantha AzzarelloNew York

Dr. David Kelly, CFANew York

Dr. Cecelia MundtNew York

Meera Pandit, CFANew York

John ManleyNew York

Tyler Voigt, CFANew York

Gabriela SantosNew York

David LebovitzNew York

Jordan JacksonNew York

Jennie LiNew York

Hugh Gimber, CFALondon Ian Hui

Hong Kong

The opinions and views expressed here are those held by the author at the date of publication which are subject to change and are not to be taken as or construed as investment advice.

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Asia | 2Q 2020