2020-3-22 JP mogan (3)

Answer to 10 common questions on COVID-19,Oil & US elections （2）

JP摩根3月11日关于病毒、石油和美国竞选的10个问题分析

Section5：What macro scenario do current valuations discount?

Despite differences in the causes of previous recesstion and / or fiscal crises, there is responsible currency in the behavior of most asset classes during the episodes.Based on either peak-to-trough moves (for bond yields, equity and commodity prices, equity multiples), trough-to-peak moves (for implied volatility and the trade-weighted dollar) or absolute levels (for credit spreads), markets price 60% to 100% odds of a typical recession, with equity vol and US 10Y rates pricing the highest odds (90-100%), and equity indices plus credit spreads somewhat less (50% to 70% odds).

A weighted average of these measures across Equities & FICC has risen to almost 70%, so near the peak risk premia generated by the Asian Crisis and EMU Crisis.

Section6：How much has low liquidity amplified market moves?

Measures of market depth show record-thin conditions in US Treasuries and Equities, but more normal conditions in Credit and above-average depth in Oil. So Rate and Equity moves may be distorted, but others don’t appear to be.

Because market depth have been declining for several years in US Equities and for the past year in USTs, the trend seems sufficiently structural to justify lower-than-average allocations even when macro conditions appear supportive.

Section7: How are investors positioned?

A daily proxy for investor positioning based on ETF flows across Equities & FICC shows fairly large underweights (-0.5 sigmas below average). A medium-term measure combining futures data, mutual fund/hedge fund betas and JPM investor surveys has fallen to neutral on cyclical assets.

Section8: Where is the value?

All growth assets have cheapened!but no major Equity or FICC market exhibits extreme value, defined as a forward P/E, credit spread, real bond yield, real exchange rate or real commodity price that’s 1-2 sigmas from long-run avg.

Section9:Do US elections matter for markets?

US elections have diminished a market risk because Biden has surged in the pools and equity markets have chapened due to oil and virus.

Best outcome : Biden presidency with Republican Senate,which preserved tax regime but minimizes disruptions from foreign/trade policy;

Second-best outcome:Trump-re-election.which preserve tax/regulatory regime but revives geopolitical risk;

Worst outcome:Democratic sweep even under Biden, give implications for corporate/capital gains taxes.