The “incomplete” recovery – J.P. Morgan AM column

After the historically unique rapid recovery on the markets, according to Tilmann Galler, capital market strategist at J.P. Morgan Asset Management in Frankfurt, now the question of whether the V-shaped development of the stock markets could represent a blueprint for the economic development. In addition, the US elections in November will gradually come into focus in the coming weeks with their possible political implications for the markets. Tilmann Galler analyzes these questions in connection with the presentation of the “Guide to the Markets” for the third quarter of 2020 and takes a look at the situation on the capital markets worldwide.

Unprecedented expansionary fiscal policy and differences in crisis management

The forecasts speak for themselves: in all countries and regions of the world, GDP growth in 2020 will be negative, in some cases even “deep red”. For the United States, for example, the US Federal Reserve is anticipating a 6.5 percent decline in gross domestic product. However, the actual development is subject to constant dynamic changes – due to the easing in many regions worldwide, economic activity has normalized again somewhat, for example in retail and industrial production. “Governments are doing everything they can to fight a possible vicious cycle of unemployment and slump in consumption. But this also requires an unprecedentedly expansive fiscal policy, ”explains Tilmann Galler. In view of the massive government support measures, the current economic situation does not feel so dramatic for many people, according to the capital market expert.

Meanwhile, the expert notes that there are some significant regional differences in state crisis management: While the United States primarily focuses on financial aid for the laid-off workers, Europe in particular wants to ensure that the connection between workers and employers is not broken , for example through short-time allowance.

The “incomplete” recovery – the US election could be affected by the crisis

With regard to the mood indicators, much looks like a V-shaped recovery, according to Tilmann Galler. But appearances are deceiving: “As long as the virus is still there and there is no complete freedom of movement, some areas of the economy will continue to have major problems. The recovery is incomplete. Only when the Covid 19 crisis has been completely overcome can this also apply to the recovery, ”explains Galler. In view of the events, especially in the USA, Latin America and partly in Asia, with rapidly increasing new infections, the current situation can last even longer than many would like.

For the US election in November, Tilmann Galler estimates that the corona crisis could also have political effects. “The majority of the US states currently severely affected by the virus are republican. It turns out that Donald Trump is on the defensive even in the states that are actually considered to be republican strongholds, ”explains Galler. It remains to be seen how both candidates for the US presidency will position themselves in the coming months, particularly with a view to further crisis management, and what this could ultimately mean for the markets.

Low interest rates create new challenges for both bonds and stocks

The current situation poses special challenges for investors. This is particularly true on the bond side, since the yields on many bonds are no longer inflation-covering. According to Tilmann Galler’s analysis, investment grade bonds are interesting despite the decrease in risk premiums, as these continue to be supported by central bank purchases and the default risks are low. In the area of ​​high interest rates, however, a closer look is necessary: ​​”The real economic effect of the pandemic was cushioned by the support measures, but as soon as these are reduced, the number of bankruptcies will increase. The number of ‘falling angels’ who fall from the investment grade segment into the high interest rate segment will therefore continue to increase, ”the capital market expert notes. In addition, there could be more defaults in high-yield bonds.

On the equity side, according to Tilmann Galler’s analysis, the price-earnings ratios (P / E ratios) have risen sharply – because, on the one hand, prices have risen, but profits have fallen. However, Tilmann Galler believes that the future potential of the stock markets has waned. Equity performance was particularly driven by growth stocks such as Google and Amazon. “Quite untypical of a market recovery at the end of a recession, there has been no shift to value stocks. Instead of energy or financial stocks, investors still prefer growth stocks. They continue to rely on the relative winners of the corona crisis, that is, primarily online-based business models, and do not believe that classic cyclical sectors will recover. In our opinion, the valuation divergences within the stock market have risen to the highest level since the turn of the millennium, ”explains Tilmann Galler.

Stock selection becomes more important, broader diversification necessary

In the current situation, it is now a matter of finding a balanced approach. It is important to focus more on quality companies with a solid balance sheet – these can be found in both the growth and value segments, as well as large caps as well as small or mid caps. Nevertheless, due to the low interest rates worldwide, new ways of investing would have to be taken, both with a view to returns and with a view to risk management. “Alternative investments help to improve the risk-return structure. These include, for example, funds with macro strategies, real estate and infrastructure investments, ”says Tilmann Galler. In principle, it is advisable to diversify internationally.

In the bond segment, Galler sees both investment-grade bonds and high-yield bonds of higher quality, as well as emerging market bonds from China, at an advantage. On the equity side, it is worth taking a look at Asia in addition to quality stocks, because the region is one step ahead of us in terms of containing the pandemic and the recovery of the economy.

Disclaimer: The text is a column of the JPMorgan Asset Management. The content of the column is not the responsibility of 4investors and therefore does not necessarily have to agree with the opinion of the 4investors editorial team. Any liability and claims are therefore expressly excluded by 4investors!

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