Better safe than sorry – the COVID-19 crisis could go either way⁠ and these are the shocks and surprises to prepare for

Will the share markets continue their bull run or will the bear stop them?Pixabay
  • Investment bank JPMorgan underlined the possible upside and downside risks that could emerge in the second half of 2020.
  • In its report, the bank notes that a second wave of COVID-19 could require additional restrictions to be put in place, thereby resulting in a bigger hit to the economy.
  • On the positive side, the report notes that a COVID-19 vaccine could help the global economy rebound, and coupled with robust fiscal measures, could lead to a rapid economic recovery.
Investment bank JPMorgan has advised investors to diversify their portfolio as the world looks to get ahead of the COVID-19 pandemic. Diversification implies dividing your savings and investments in different assets like gold, fixed income, and not bet all your money on risky assets like equities. This is good advice for uncertain times like the one we are in currently.

If there is a shock⁠— like another surge in infections and deaths ⁠— then the prices of gold and the US dollar may rise and equities may fall. Similarly, if there is a surprise⁠— like the development of a vaccine⁠— investments in shares may surge while gold may lose value.

The report tries to identify the possible risks – both upside and downside – that could emerge in the second half of 2020.

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The downside risks that investors need to watch out for

  • The possibility of a second wave of COVID-19 infections across the world requiring more restrictions to be put in place.
  • Small businesses failing and snowballing into an unemployment crisis.
  • Consumption activity not picking up as people prefer shoring up their savings instead of spending on non-essential items.
  • Flare up in geopolitical tensions, as is happening in the case of India and China, and the resumption of the US-China trade war.
  • Higher tax rates as governments try to make up for the revenue shortfall.
The possible surprises in store

  • COVID-19 vaccine becomes available by the end of 2020.
  • Consumption activity picks up steam after restrictions are lifted.
  • Fiscal and monetary measures act as a catalyst for economic recovery.
  • Bond yields remaining low, resulting in equity becoming a better investment option.
However, global equities have risen sharply

The recent rally in global markets is essentially driven by the money pumped in by global central banks and governments to stimulate respective economies.

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This is unlikely to sustain without a meaningful recovery in the real economy that leads to restoration of jobs and consumer demand.

IndexCountryPerformance in the last one month
IBOVESPABrazil18%
NiftyIndia14%
CACFrance12%
DAXGermany11%
NikkeiJapan8%
IndonesiaIndonesia7%
MEXBOLMexico7%
TAIEXTaiwan6%
S&P 500USA5%
FTSE100UK5%
Shanghai CompositeChina5%
FTSE Straits TimesSingapore4%

Therefore, JPMorgan has advised investors to be more selective with their investments in the second half of 2020 as the effects of liquidity boost wean off.

A patchy recovery
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JPMorgan notes that Asia is a “tale of two extremes”, wherein one part of the continent has recovered while the other remains in lockdown to contain the pandemic.

While China has resumed work in its manufacturing sector, the report observes that consumer demand is still sluggish which is restricting growth. Consumer sentiment is coming back up in South Korea, while Japan is coming out of its state of emergency. East Asian countries which depend heavily on tourism carry considerable economic risk, the report notes.

Better safe than sorry
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The odds and timing of the possible shocks and surprises is difficult to ascertain now. “As we look forward, the range of possible outcomes is wide. The opposing tail risks of a second wave in the fall (clear negative) or the development of an effective vaccine or treatment (clear positive) illustrate this dispersion. Diversification is critical in this environment,” the report states.

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