JP Morgan: Perspectives on the COVID-19 recovery and implications for US Elections: Key reports from economics, strategy, FICC and equity research
JP모건의 한주간의 소식: COVID-19, 미국 대선, 경제 금융, FICC 등
- 아래 주요 이슈별로 제목을 클릭하시면 상세 내용 볼 수 있습니다
- 대선 여론 조사는 민주당 존 바이든 후보의 우세가 커지고 있어 선거 관련된 갈등과 지연 가능성이 줄어들고 시장 참여자들은 민주당의 승리에 따라 내년 초에 대규모 경기 부양책이 통과되어 시장에 긍정적인 결과를 가져다 줄 것으로 기대하고 있다.
Polls for the US elections continue to show a widening lead for Democratic candidate Joe Biden, reducing fears of delayed and contested scenarios, with markets anticipating that a potential Blue Wave could likely lead to passage of a large fiscal stimulus in early 2021, which would be a positive for markets and help support a rotation across sectors, styles and countries. Market attention will focus on the Senate races and key swing states in the coming weeks, and our litigation proxy is relatively high for states where probability is close to 50/50: FL, AZ, OH, GA and NC. There is still good rationale and value in being hedged against election risk, both on lingering contested election tail risk, and on a potential surprise if Biden announces an early move ahead of an economic package that includes tax hikes, in the scenario that he wins the presidency and Congress. This presents opportunities in shorts in cyclically sensitive currencies that outperformed most during the summer reflation trade and longs in USD and alternative reserve currencies like JPY (both reflected in our macro portfolio), as well as opportunities in FX vol where de-pricing of contested election risk in recent weeks has become too complacent. The near-term outlook for Europe has darkened as a result of the resurgence in COVID-19 as softening mobility data in Europe due to the virus and containment measures flag downside risk to our 3.5% Q4 Euro area forecast. But national fiscal plans unveiled for next year look considerably more supportive, pointing to an overall tightening of less than 1% of GDP.
US elections outlook and cross asset market implications
Polling has further consolidated around a Biden advantage in the Presidential Election and options markets have steadily reduced event risk priced on and around Election Day across a wide range of global asset classes.Prediction markets appear to be pricing noticeably more uncertainty, though they too have corrected a bit. A wider margin of victory reduces the risk of delayed or contested results, but that does not mean it is entirely absent. We review four elements of this risk across states, including their “importance” to the final result, the potential for mail-in ballots to delay the final count (incorporating restrictions due to state law), a quantitative metric for litigation risk, and mobility data as a proxy for likely reliance on vote-by-mail. In 2012, depth was stable heading into Election Day, and rose following a consensus outcome. In 2016, though depth declined on a surprise Trump win, the persistence of HFT activity points to resilient microstructure even amidst relatively poor depth.
The recent sharp increase in polling and betting market odds for a Blue Wave sweep reduces the probability, and likely severity, of any delayed/contested election scenarios. Markets have responded to this shift in event risk and outcome odds by broadly selling-off the dollar, particularly against high-beta FX back towards mid-September lows. There is still good rationale and value in being hedged against election risk, both on lingering contested election tail risk, and on a potential surprise if Biden announces an early move ahead of an economic package that includes tax hikes, in the scenario that he wins the presidency and Congress. This presents opportunities in shorts in cyclically sensitive currencies that outperformed most during the summer reflation trade and longs in USD and alternative reserve currencies like JPY (both reflected in our macro portfolio), as well as opportunities in FX vol where de-pricing contested election risk in recent weeks has become too complacent.
Though early, we discuss a potential capital gains tax rate increase in the US and conclude that there will be little impact from a prospective capital gains tax rate increase on risk taking and investors’ attitude toward equities as an asset class, given the current low yield and high equity risk premium environment over the longer-term.Assuming a Democratic sweep and a likely effective date of the new higher capital gains tax rate of 1 January 2022, we are likely to see some downward pressure in equity markets in Q4 2021, i.e., in a year’s time. But once the new capital gains tax rate kicks in, the equity market is likely to resume its upward trajectory in a strong manner as it did previously in the first half of 1987 and 2013.
EM’s cyclical drivers will take a backseat as we navigate a month or more of US election uncertainty. The cyclical outlook as we head into Q4 looks to be one that is fundamentally supportive of EM bonds. Global growth is slowing with our DM growth forecasts downgraded while incoming EM data has led to some growth upgrades, given their greater reliance on the manufacturing sector. For EM bonds, this should keep global rates low and financial conditions loose, while allowing risk premia to compress. EM assets will likely perform better under a Biden victory, in our view, but the magnitude of market moves on this US election result should be smaller than in 2016. However, election uncertainty will likely be volatile for EM assets. We pared back positions in local markets, staying OW local rates but moved some risk to LY from HY and stay MW EM FX having trimmed in Asia FX; in EM credit, we stay OW EM sovereigns and corporates given valuation buffers and lower election sensitivity.
Resurgence of COVID-19 infections leads to reinstatement of containment measures in some countries
Daily new infections accelerated to >300k cases last week spotlighting infection resurgence risks. Increasing hospital capacity burden, repeat of partial lockdowns and lower mortality risks become more likely as winter nears. While there is growing evidence that COVID-19 could be spread airborne, Germany/Hong Kong SAR (HK)/Singapore with stricter mask-on rules seem to have slower infection development compared to countries without mandatory mask-on rules and we believe social distancing and wearing masks is one of the best ways to reduce transmission rate at this stage. Further, in our view, if the average recovery period is to shorten from about 2 weeks currently to less than a week, this should open a new window for curve control, the economy, and the public stress level on social distancing. Therefore, until the vaccine is available to the public at large, discovery of potential anti-virus therapies/drugs for COVID-19 could be the focus.
Data for UK for the week of September 28 - October 4 was restated upwards to 61,788 which equates to 33% growth in cases. The range of new infections for the week stood at 4,662 and 11,754 per day. However, the rate of hospitalisations has fallen to 4.4% of infections. Overall the picture in the UK on infections is worse on the restated data, showing no letup in the increase in cases, with cases rising by 33% last week. Still the low and falling rate of hospitalisations remains somewhat reassuring.
Regeneron’s REGN-CoV2 antibody cocktail therapy for COVID-19 made a number of headlines this week, as it was announced that President Trump received the therapy – “The Regeneron” – after contracting COVID-19.Additionally, the company requested emergency use authorization from the FDA. Upon clearance, there’s currently enough doses available for ~50,000 patients, and this should expand to ~300,000 patients in a matter of months. Moderna plans to disclose when the first interim is triggered regardless of the outcome, and the management remains confident that the first interim will happen sometime in November. For Gilead, the final results from the NIAID sponsored trial of remdesivir (Veklury) in COVID-19 hospitalized patients demonstrate faster recovery and suggest reduced mortality.
Global economics and macro implications of COVID-19
The top 10% of households gained over $5.6 trillion in wealth in 2Q. The bottom 50% of households in the wealth distribution saw their aggregate net worth increase by $179 billion that quarter; meanwhile the top 1% of households registered a $2,843 billion increase in wealth in 2Q. Among other things, the latest SCF showed that the deleveraging of households that occurred in the last expansion was widespread across a number of categories, and thus most households probably entered the most recent recession with cleaner balance sheets than they had going into the Great Recession. This may partly explain the quick turnaround in consumer spending beginning in May. The wealth of Black households continues to lag; Hispanic households experienced some catch-up recently.
Mobility data is a reasonable proxy for real-time hiring activity through the pandemic but huge standard errors raise questions about the usefulness of alt-data when world returns to normal. While global GDP slumped roughly 10% in 1H20 (unannualized), our 20-country subset of monthly employment data fell 6.5% from 4Q19 through midyear. All countries in this sample recorded declines, but the magnitude of the slump varied widely. The US and Canada stand out with roughly 15% plunges in overall employment through April. Our incomplete recovery forecast expects a lag in hiring during the first year of the recovery that keeps employment levels depressed relative to the pre-crisis path. Specifically, we have seen that the Google mobility data aligns well with actual employment outturns. And the latest news from the mobility indexes suggest that, after a moderation in July and August, employment growth picked up pace in September. Our analysis raises a warning as well regarding the rise of alt-data. The strongest relationship between the mobility data and employment is in the US.
With COVID-19 circulating and temperatures falling, the US will face difficult choices about moving some kinds of economic activity indoors. We could move activities like dining, entertainment, and recreation inside at the risk of hastening the spread of the virus, or we could cut back on these activities at the risk of slowing the economic rebound. In the data through early October, we see some signs of both responses, though the pullback in spending has been muted so far. It is quite clear that the recent upswing in new COVID-19 cases has been concentrated in states with the coolest September temperatures, like Wyoming, Montana, Wisconsin, Minnesota, Alaska, and North and South Dakota. The recent resurgence of the virus also raises the question of whether the economic recovery could stumble if consumers do turn cautious.
The economic toll from COVID-19 is challenging shareholder primacy and accelerating the trend toward stakeholder capitalism. COVID-19 has been a great leveler between ‘E,’ ‘S,’ and ‘G, ’ with more focus on ‘S’ and ‘G.’ While European companies appear more advanced in adapting their corporate governance framework to changes that advance stakeholderism, it will endure in the US, reflecting evolving work arrangements, public opinion and a bigger government role in the corporate sector. Greater integration of ESG factors into investment processes, “Double Materiality”—Financial Materiality and Sustainable Materiality—represents the next step for ESG reporting. Green bond market now exceeds $800bn, with launch of J.P. Morgan Green Bond Index planned. There is concern that stakeholderism may lower capital returns for shareholders in some sectors with share buybacks facing greater criticism while dividends have been reduced during the COVID-19 crisis.
As polls swing further towards Biden, pre-occupations with the current fiscal cliff and a contested election have been overtaken by a more constructive baseline involving a Democratic sweep and material fiscal stimulus through 2021. For a global expansion that is decelerating and seems accident-prone, such support reboots a range of reflation trades that are common after mid-cycle slowdowns and recessions, and which had been fading until recently. We answer the number one question by each asset class, but caution about two wildcards: that either Biden or Trump faces a divided Congress in 2021 no more willing to spend than the current one (due to a conservative minority of Republican Senators); or that a Blue Wave (more House seats) skews a centrist Biden agenda towards progressive policies. The US seems unlikely to deliver additional fiscal stimulus until after the election, and then only assuming a Democratic sweep. Because of a high US savings rate (14%), the risks to our baseline 2.5% growth call for Q4 look balanced. By contrast, softening mobility data in Europe due to the virus and containment measures flag downside risk to our 3.5% Q4 forecast. A potential Biden victory could be a positive for the market and help support a rotation across sectors, styles and countries.
The surge in non-financial corporate debt in G4 Flow of Funds is a reminder of the bigger role that the private sector currently has in boosting global debt levels relative to the Lehman crisis. There are three main implications from the big increase in global indebtedness: low economic growth and inflation over the long term, persistently low interest rates, and more liquidity. Further, Japanese and EM stocks look most attractive based on our short base indicator, followed by UK stocks. US and Euro area stocks look least attractive. Pockets of overextension in UST curve positions.
3Q saw slightly more ratings upgrades than downgrades in HG credit which is a sharp reversal from 1H20 when $413bn more debt was downgraded than upgraded. Most of the upgrades within the HG bond market in 3Q were in the Technology sector ($9bn) and Basic Industries ($9bn). Rising Stars were $10bn in 3Q, which is almost twice the amount in 1H20, mainly driven by one issuer in the Utilities sector. Most of the Non-Financial downgrades this year occurred within the A-rated bucket ($193bn), followed by fallen angels ($165bn) and downgrades within BBB ($132bn). The average credit rating of the HG index has improved slightly but was driven by more fallen angels leaving the index than downgrades from A to BBB whereas issuance trended in the other direction (up for BBB and down for A). We may undershoot our FY fallen angel estimate of $215bn as we are at $167bn YTD and rating actions have stabilized recently. However, 35% of the $820bn of non-Financial BBB- debt is on negative rating outlook by at least one rating agency, and about $30bn of this already has one HY rating.
As of September, US$31 trillion worth of fixed-rate DM sovereign debt (or 76%) posted negative yields after adjusting for inflation, more than double the amount from just two years ago. In aggregate, after adjusting for inflation, 70% of global sovereign debt posts negative real yields. Low real interest rates, and subsequently low bond real yields have dominated global economy in the past decade, with every deflationary shock delivering more countries closer to the negative yield realm. Since March, the entire US Treasury real yield curve has been trading below zero, and the nominal negative yielding DM sovereign debt increased by 50% YTD to US$14 trillion outstanding. Half of the negative real yield debt stock in the DM universe comes from the US (US$17 trillion), followed by 23% from the EMU countries, and 11% from Japan.
Sector Level Views
While there has been tremendous investor interest in COVID-19 vaccines and the associated revenue opportunities for CDMO and bioprocessing companies in our coverage, quantitative disclosure has been scarce to date, and company guidance has been mostly short term and conservative. To help investors better size the COVID-19 vaccine manufacturing revenue opportunities for CDMOs (including CTLT and TMO) and bioprocessing vendors (including DHR, TMO, AVTR, RGEN, etc.) and assess potential upside to current company guidance and consensus estimates, we have put together a deep dive based on our expert interviews and proprietary calculations.
Last week IATA cut its 2020 global traffic forecast to -66% yoy from -63% yoy, but did not update its 2021 forecast which currently (July 28th) sees c75% yoy growth. J.P. Morgan’s US & European Civil Aerospace team now assume 2021 global air traffic growth of just c50% yoy, with potential for a stronger recovery in 2022. This weaker traffic implies downside to estimates for late 2020 / early 2021 but the outlook for Civil Aero shares is more nuanced, with some investors looking through this to a vaccine-driven recovery that may begin in earnest around mid-2021. Positioning for the challenging winter ahead is therefore an important consideration with regard to where and when to add Aero exposure.
We turn bullish on our shipping sector coverage, both container shipping and bulk shipping, upgrading COSCO-H to OW and lifting our Jun-21 PT to HK$5.3, Evergreen Marine to OW with Jun-21 PT unchanged at NT$20 and upgrading Pacific Basin (PB) to OW with Jun-21 PT lifted to HK$1.7. We remain OW on COSCO-A with the same PT (Rmb7.1). Shipping is providing connectivity in the physical world amid COVID-19 disruption, when most people have stopped travelling.