Global Economy May See An Overstimulated Second Half Of 2020: JPMorgan

The global economy may be looking at an over-stimulated second half of 2020 as governments announce measures to counter the slowdown and the selloff triggered by the new coronavirus outbreak.

That’s according to James Sullivan, head of Asia-ex Japan equity at JPMorgan. The virtual trade shutdown because of the virus will see both governments and central banks react with stimulus ease the situation in the first half, he said.

JPMorgan is pencilling in a 25 basis-point rate cut by the U.S. Federal Reserve in July. The stimulus, however, will have its implications on inflation globally, he said.

Global shares are on track for their worst week since the 2008 crisis amid fears of the outbreak in the U.S. and with the number of cases rising in South Korea and Japan. Oil fell further and dollar yields shrunk to fresh lows. Bank of America predicted that the global economy will see its weakest year since the financial crisis.

Still, according to Sullivan, the selloff should be looked at from the perspective of where the markets were before it began. They were “looking very stretched” as equities were at an all-time high, gold was at a seven-year high, and bond markets were near record lows, he said.

Weak earnings and reduced growth forecasts will further drag the markets down in the next couple of weeks even though some high-frequency indicators in China are showing signs of improvement, he said, adding valuations are still elevated and could see further contraction and a near-term recovery will be elusive.

While India is relatively immune, he cautioned that if the growth premium of developing markets versus developed markets shrinks, allocation from emerging market funds will likely suffer in the short-term.

Watch | Are we heading into an overstimulated economy?