Climate-related catastrophes could be the next type of disasters to strike, says JPMorgan

Published Thu, May 7 20207:01 AM EDT

Pandemics and climate-related catastrophes aren't only similar for the havoc they wreak on society. The uncertainty around these types of events means populations and investors alike do not adequately prepare for them, JPMorgan said in a recent note to clients. And with climate-related disasters expected to become both more frequent and intense, the firm identified the best ways for investors to hedge their exposure. "Both are global and existential threats sometimes neglected by policymakers and ignored by investors because they seem intangible or remote until they actually strike," said John Normand, JPMorgan's head of cross-asset fundamental strategy. He noted that following disasters measures are usually implemented to prevent recurrence, but that little action is taken "until a catastrophe crystalizes a wildcard." JPMorgan said that investors can look at the crisis wrought by the coronavirus as indication of what could potentially happen should a climate disaster take place. In the U.S. more than 30 million people have now filed for unemployment in the last six weeks, and as states begin to reopen, economists have warned that the road to recovery will be a long one. Given the uncertainty around when a climate catastrophe could hit, the firm said structural hedges should be focused on "instruments with an asymmetric bias in coming years." For U.S. investors, Normand said the yen and quality stocks are good options to hedge against a growth shock due to a climate disaster since they have shown a "consistent tendency to outperform when equities decline." In the last 10 years, the firm found that these assets outperformed between 80% and 90% of the time. "Quality stocks" is an investing strategy where emphasis is placed on factors like a company's balance sheet and management team. Over the next few fears JPMorgan doesn't see downside for these assets due to loose U.S. monetary policy. The firm also noted that over the last decade gold outperformed when equities dropped 64% of the time, and said that looking ahead it could get an additional boost in a low-interest rate environment. Bonds have also traditionally held up when stocks decline, but with yields already so low the firm believes there's less upside potential this time around. "US Treasury yields are approaching the zero lower bound and thus have less scope to rally on an adverse event," Normand said. - CNBC's Michael Bloom contributed reporting.