The first six months of 2020 altered the economics, policy and investing landscape more profoundly than any other half-year period of modern history. 
A quick glance at employment data drives this message home – the US unemployment rate leaping from a 51-year low of 3.5 per cent in February to a post-second world war high of 14.7 per cent in April. But equally, the massive policy response, coordinated across fiscal and monetary stimulus in the US and around the world, will shape the global economy for years to come.
Immediately following the shutdown of much of the world’s economy in March, the outlook appeared dire indeed. But today, although we have recorded the deepest economic contraction in 90 years, it looks like it could also be the shortest. Leading economic data already point to a second-half rebound in activity and earnings, and the impact of stimulus is stoking pent-up demand, in turn pushing economic surprise indicators to new record highs.
We believe that the recovery now has a foothold and will extend in the latter half of 2020. To be sure, we anticipate further bouts of volatility, particularly in the run-up to the US election, but we believe that the economy is now exiting recession and will move swiftly into, and through, its early-cycle phase. Still, we expect that fiscal and monetary stimulus will remain a significant feature for some time to come – possibly well into the coming expansion. Over time, this will profoundly shape the next cycle. For the moment, though, we think that the early-cycle phase will largely follow a familiar recovery playbook, with stocks and credit remaining well supported, if choppy.
To some, this scenario might paint an overly optimistic picture, but we would counter that early evidence from Asia indicated significant pent-up demand. Moreover, in regions like Europe the path of the virus has forced long-overdue policy pivots, which can create lasting benefits to the regions’ economies and asset markets. Clearly, risks persist, and we will need to be nimble in the months to come, but equally history suggests that a recovering economy should support equity and credit markets.
While the recovery appears to be global – in large part due to the global nature of the virus that triggered the recession – there will still be winners and losers. The capacity to provide fiscal and monetary stimulus is likely to be a key determinant of the pace of recovery. So too will be choices around how to contain any future outbreaks of Covid-19, although we expect many countries will want to avoid a new round of lockdowns, preferring more targeted restrictions that minimise economic damage.
As we adopt a progressively more upbeat outlook, prompted by the turn in economic data, the bottoming of earnings revisions and the ongoing wall of stimulus, we raise our view on stocks and credit from neutral to overweight in our multi-asset portfolios. We recently reduced our view on duration from neutral to underweight, and we maintain this slightly negative tilt while trimming our mild cash overweight back to neutral. These changes represent a more risk-on tone and reflect the re-risking process that started in our portfolios in mid-Q2. Beginning with a rotation into investment grade credit and covering shorts in cyclical equities, more recently we added risk in high yield and global equities.
In equities, we maintain our positive view on US stocks, although with a greater focus on small caps, and keep a positive tilt to European and emerging market equities. The UK and Canada are our preferred funding markets, but broadly we believe a widely diversified equity overweight is most appropriate, given the widespread recovery in earnings we expect in the second half of the year. In bonds, we favour the US and Australia over German Bunds, while in credit we continue to see merit in investment grade and, increasingly, in high yield, but we are less enthusiastic about emerging market debt.
In summary, these portfolio tilts combine to give a distinct risk-on feel to our multi-asset portfolios – following a pattern of gradually increasing risk tolerance that began in late April. However, we note that volatility remains rather elevated and uncertainty is heightened at this stage of the cycle due to the virus, and as a result position sizes are still quite modest. Monetary accommodation will likely keep volatility on a gradually downward trajectory, on average, but certainly doesn’t preclude episodes of higher volatility. Today we believe that there is sufficient economic momentum to sustain support for stock and credit markets, despite some optically elevated valuations. However, looming political uncertainty over the summer, plus the constant unfolding of the coronavirus story, mean that we are in equal measure optimistic and watchful.
John Bilton is head of global multi-asset strategy at JP Morgan Asset Management. The views expressed above are his own and should not be taken as investment advice.