Guide to the Markets - XSTREAMING.ES...Source: 2021 Long-Term Capital Market Assumptions, J.P....
Transcript of Guide to the Markets - XSTREAMING.ES...Source: 2021 Long-Term Capital Market Assumptions, J.P....
Guide to the Markets
MARKET INSIGHTS
Karen Ward, Chief Market Strategist, EMEA
January 2021
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Summary
• Monetary and fiscal policy provided a bridge over troubled waters
• And thanks to the vaccine we can now see the other side
• Bridges are expensive…interest rates will have to stay low
• So we need to work harder for portfolio returns:
• Identifying the equity market rotations that are likely as the
recovery takes hold
• Taking advantage of Asia’s decade
• Taking advantage of the shift from consumer tech to climate tech
• Using alternatives to improve the risk/return of a portfolio
• Remain watchful of the risks…particularly inflation
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2021 Outlook: A bridge over troubled waters
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|The policy bridge
Government budget deficits and central bank government bond purchases% of nominal GDP, 2020 estimate
Source: Bank of England, Bank of Japan, Bloomberg, European Central Bank, IMF, US Federal Reserve, J.P. Morgan Asset Management. Budget deficits as % of GDP are forecasts for 2020 from
Bloomberg contributor composite. Central Bank government bond purchases are J.P Morgan Asset Management forecasts for 2020. Past performance and forecasts are not reliable indicators of current
and future results. Data as of 17 November 2020.
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10
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16
UK US Eurozone Japan
2020 change in budget deficit as % of GDP Central banks' government bond purchases as % of GDP
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US focus: Saving, borrowing and bankruptcies
Source: (Left) Bloomberg, US Federal Reserve, J.P. Morgan Asset Management. (Right) Administrative Office of the United States Courts, Refinitiv Datastream,
J.P. Morgan Asset Management. Periods of “recession” are defined using US National Bureau of Economic Research (NBER) business cycle dates. Past performance is not a reliable indicator of current
and future results. Guide to the Markets - Europe. Data as of 31 December 2020.
US net saving and borrowing by sector% of nominal GDP
US company bankruptciesThousands of companies per quarter
Net
borrowing
Net
saving
Recession
-30
-20
-10
0
10
20
30
'94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20
Government
Households
0
2
4
6
8
10
12
14
16
18
20
'94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20
25
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Eurozone government debt and bond spreads
France, Germany, Italy and Spain government debt to GDP European 10-year government bond spreads over Germany% of nominal GDP % spread
Source: (Left) Bank for International Settlements, Refinitiv Datastream, J.P. Morgan Asset Management. Italy and France data are four-quarter moving averages. Debt refers to gross debt. Dotted lines
represent the IMF forecasts for government debt to GDP in 2020 and 2021. (Right) Refinitiv Datastream, J.P. Morgan Asset Management. Past performance is not a reliable indicator of current and future
results. Guide to the Markets - Europe. Data as of 31 December 2020.
Germany
Spain
France
Italy
Spain
France
Italy
0
1
2
3
4
5
6
7
'07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20 '21
0
20
40
60
80
100
120
140
160
180
'07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20 '21
Forecast
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|The bad news…starting valuations are stretched in some markets
Equity and credit valuations at the start of the cyclex, multiple (LHS); % point option-adjusted spread (RHS)
Source: Bloomberg Barclays, ICE BofA, MSCI, Refinitiv Datastream, Standard & Poor's, J.P. Morgan Asset Management. April 2009 and May 2020 mark the start of the last two US cycles as defined by the
trough in earnings per share estimates. US: S&P 500; Europe: MSCI Europe; EM: MSCI EM; Global HY: ICE BofA Global High Yield; Global IG: Bloomberg Barclays Global Aggregate – Corporates. Past
performance is not a reliable indicator of current and future results.
Data as of 17 November 2020.
0
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4
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10
12
14
16
0
5
10
15
20
25
US Europe EM Global HY Global IG
Equity CreditApril 2009 May 2020
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Themes for 2021
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The Covid winners/losers narrative could change
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20
40
60
80
100
120
140
160
20
40
60
80
100
120
140
160
Equity focus: Earnings and stock market dispersion
Global equity forward earnings estimates Global equity performance by sectorNext 12 months’ earnings per share, rebased to 100 at the start of 2020 Total return index level, rebased to 100 at the start of 2020
Source: (All charts) IBES, MSCI, Refinitiv Datastream, J.P. Morgan Asset Management. ACWI is the All Country World Index and includes developed and emerging market stocks. Past performance is not a
reliable indicator of current and future results. Guide to the Markets - Europe. Data as of 31 December 2020.
MSCI ACWI
Cons. Disc.
IT
Comm. Serv.
Financials
Industrials
Energy
Jul ’20Jan ’20 Mar ’20 Sep ’20 Nov ’20May ’20 Jul ’20Jan ’20 Mar ’20 Sep ’20 Nov ’20May ’20
MSCI ACWI
Cons. Disc.
IT
Comm. Serv.
Financials
Industrials
Energy
Jan ’21 Jan ’21
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Asia’s decade
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|China’s bounceback has been extraordinary
Real GDP levelsIndex level, rebased to 100 at 1Q 2006
Source: BEA, Bloomberg, Eurostat, National Bureau of Statistics of China, ONS, J.P. Morgan Asset Management. Forecasts are from Bloomberg
contributor composite. Past performance and forecasts are not reliable indicators of current and future results. Guide to the Markets - UK.
Data as of 17 November 2020.
40
100
160
220
280
340
400
90
100
110
120
130
140
150
'06 '08 '10 '12 '14 '16 '18 '20 '22
Forecast
Eurozone
US
UK
China
Glo
ba
l e
co
no
my
48
49
GTM - Europe
GTM - UK
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0
10
20
30
40
50
60
70
80
90
100
Emerging market focus: Share of global GDP and rising middle class
Source: (Left) Refinitiv Datastream, World Bank, J.P. Morgan Asset Management. (Right) Brookings Institute, J.P. Morgan Asset Management. Middle class is defined as $3,600-$36,000
annual per capita income in purchasing power parity terms. Historical (1995) and forecast figures (2019 and 2030) come from the Brookings Development, Aid and Governance Indicators.
Past performance is not a reliable indicator of current and future results. Guide to the Markets - Europe.
Data as of 31 December 2020.
Share of global real GDP%
Growth of the middle class% of population
0
5
10
15
20
25
30
'70 '75 '80 '85 '90 '95 '00 '05 '10 '15 '20
US
Eurozone
China
Japan
India
20191995 2030 forecast
India Indonesia China Brazil Mexico
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0 2 4 6 8 10 12 14 16
EM stocks looks favourable on our long-term projections
2021 Long-Term Capital Market Assumptions expected returns in coming 10-15 years%, annualised return in EUR
Source: 2021 Long-Term Capital Market Assumptions, J.P. Morgan Multi-Asset Solutions, J.P. Morgan Asset Management. Returns are nominal and in EUR. Past returns are calculated from the start of
2009 up to the end of October 2020, or the most recent available data. The projections in the chart above are based on J.P. Morgan Asset Management’s proprietary long-term capital market assumptions
(10-15 years) for returns of major asset classes. The resulting projections include only the benchmark return associated with the portfolio and do not include alpha from the underlying product strategies
within each asset class. The assumptions are presented for illustrative purposes only. Past performance and forecasts are not reliable indicators of current and future results. Guide to the Markets - Europe.
Data as of 31 December 2020.
Euro cash
Euro government bonds
Euro government inflation-linked bonds
Euro investment-grade corporate bonds
US large cap
Global infrastructure
European ex-UK core real estate
Asia ex-Japan
Emerging markets
Fixed income
Equity
Alternatives
Historical return since 2009
Japan
Eurozone large cap
80GTM - UK
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Global momentum towards tackling climate change
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All regions will have to intensify efforts to meet their climate objectives
Emissions targets Global emissions covered by carbon pricing initiatives MtCO2e/year % of global emissions
Source: (Left) ClimateActionTracker, J.P. Morgan Asset Management. MtCO2e is metric tons of carbon dioxide equivalent. (Right) World Bank, J.P. Morgan Asset Management. ETS is emissions trading
system. *Carbon price or tax is based on nominal prices from 1 April 2020. China ETS carbon price is based on the Beijing pilot ETS. Other notable carbon prices are; Switzerland ETS carbon price: 19
USD; UK carbon price floor: 22 USD; US California ETS: 15 USD. Past performance and forecasts are not reliable indicators of current and future results. Data as of 31 October 2020. Past performance is
not a reliable indicator of current and future results. Guide to the Markets - Europe. Data as of 31 December 2020.
0
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4.000
6.000
8.000
10.000
12.000
14.000
16.000
1990 2000 2010 2020 2030 2040 2050 2060
US
EU
China
Government net
zero targets
Carbon tax/price*
12 USD
3 USD
33 USD
19 USD
0
5
10
15
20
25
'00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20
Other
EU ETS
South Korea ETS
Japan carbon tax
China ETS
Forecast
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0
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Sustainable investment performance and market size
Sustainable investment assets under managementUSD trillions
Source: (Left) MSCI, Refinitiv Datastream, J.P. Morgan Asset Management. The MSCI World ESG Leaders Index is a capitalisation-weighted index that provides exposure to companies with high
Environmental, Social and Governance (ESG) performance relative to their sector peers. It aims by design to have a relatively low tracking error to MSCI World. (Right) Global Sustainable Investment
Alliance (GSIA), J.P. Morgan Asset Management. Past performance is not a reliable indicator of current and future results. Guide to the Markets - Europe. Data as of 31 December 2020.
17%
114%25%
19%
8%
2016
Compound annual
growth rate
2018
Europe US Japan Canada Australia/New
Zealand
MSCI World ESG performanceIndex level in USD, rebased to 100 at Jan 2008
MSCI World
MSCI World ESG leaders
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60
80
100
120
140
160
180
200
'08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20
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The debt deluge means lower interest rates for even longer
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100
120
'40 '50 '60 '70 '80 '90 '00 '10 '20 '30
US debt
US federal net debt US nominal GDP growth and 10-year Treasury yield% of nominal GDP, by end of fiscal year %, nominal GDP growth is % change year on year
Source: (Left) BEA, Congressional Budget Office (CBO), Treasury Department, J.P. Morgan Asset Management. CBO forecast is from its September 2020 Budget forecast. (Right) BEA,
Haver Analytics, Robert Shiller, J.P. Morgan Asset Management. Past performance is not a reliable indicator of current and future results.
Guide to the Markets - Europe. Data as of 31 December 2020.
CBO
Forecast
2020:
100,1%
2030:
108,9%
0
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16
'40 '50 '60 '70 '80 '90 '00 '10 '20
US nominal GDP
10-year moving
average
US 10-year Treasury yield
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-2
-1
0
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2
3
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8
Fixed income yields
Fixed income yields%
Source: Bloomberg, Bloomberg Barclays, ICE BofA, J.P. Morgan Economic Research, Refinitiv Datastream, J.P. Morgan Asset Management. Beta to MSCI World is calculated using monthly total returns since 2008.
Indices used are as follows: Euro IG: Bloomberg Barclays Euro-Aggregate – Corporate; Global IG: Bloomberg Barclays Global Aggregate – Corporate; UK IG: Bloomberg Barclays Sterling Aggregate – Corporate; US
IG: Bloomberg Barclays US Aggregate – Corporate; Euro HY: ICE BofA Euro Developed Markets Non-Financial High Yield Constrained Index; Global HY: ICE BofA Global High Yield Index; US HY: ICE BofA US High
Yield Constrained Index; EMD corporate: CEMBI Broad Diversified; EMD local: GBI-EM Global Diversified: EMD local – China: GBI-EM China: EMD sovereign: EMBI Global Diversified; EMD sov. IG: EMBI Global
Diversified IG; EMD sov. HY: EMBI Global Diversified HY. Past performance is not a reliable indicator of current and future results. Guide to the Markets - Europe. Data as of 31 December 2020.
Developed market
government bondsInvestment-grade bonds High yield bonds Emerging market bonds
Return beta to MSCI World
-0,1 0,0 -0,1 0,1 -0,2 0,1 0,2 0,3 0,2 0,2 0,2 0,2 0,4 0,5 0,4 0,5 0,5 0,3 0,0 0,3 0,1 0,4 0,5
67GTM - UK
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Rethinking the 60:40 portfolio
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Fixed income focus: Yield compression and government bond returns
Developed market government bond yields% of ICE BofA Global Government Bond Index
Source: (Left) Bloomberg, ICE BofA, J.P. Morgan Asset Management. Index shown is the ICE BofA Global Government Bond index. (Right) Refinitiv Datastream, J.P. Morgan Asset Management. Returns
are shown over the period when MSCI World was falling in local currency terms. Tech bubble: 24 Mar '00 to 21 Sep '01; Global financial crisis: 13 Jul '07 to 9 Mar '09; Eurozone sovereign debt crisis: 18 Feb
'11 to 3 Oct '11; Covid-19: 19 Feb '20 to 23 Mar '20. Past performance is not a reliable indicator of current and future results. Guide to the Markets - Europe. Data as of 31 December 2020.
10-year government bond returns during equity market shocks
%, total return over the period
% yielding below 1%
% yielding below 0%
US
Germany
UK
-5
0
5
10
15
20
25
30
35
Eurozone sov.
debt crisis
Tech bubble Covid-19Global financial
crisis0
10
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60
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90
100
'14 '15 '16 '17 '18 '19 '20
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0 2 4 6 8 10 12 14 16 18
Co
mp
ou
nd
retu
rn
Volatility
Expected returns and volatility for a EUR investor in coming 10-15 years % annual compound return
Source: 2021 Long-Term Capital Market Assumptions, J.P. Morgan Multi-Asset Solutions, J.P. Morgan Asset Management. The resulting projections include only the benchmark return associated with the
portfolio and do not include alpha from the underlying product strategies within each asset class. Macro hedge fund return expectations are currency hedged. The assumptions are presented for illustrative
purposes only. Past performance and forecasts are not reliable indicators of current and future results. Guide to the Markets - Europe. Data as of 31 December 2020.
100% Eurozone
large cap60% Eurozone large cap
10% Euro government bonds
10% Europe ex-UK core real estate
10% Global infrastructure equity
10% Macro hedge funds
60% Eurozone large cap
40% Euro government bonds
100% Euro government bonds
Adding alternatives may help improve the risk/return profile of a portfolio
Oth
er
asse
ts
82GTM - Europe
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Central projections and risks
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Inflation would be an unwanted guest
UK and US headline inflation with forecasts US headline personal consumption deflator% change year on year % change year on year
Source: (Left) BLS, ONS, J.P. Morgan Securities Research, J.P. Morgan Asset Management. Forecasts are from J.P. Morgan Securities Research and are from Q4 2020 onwards. (Right) Refinitiv
Datastream, J.P. Morgan Asset Management. Past performance and forecasts are not reliable indicators of current and future results. Data as of 30 November 2020.
-0,5
0,0
0,5
1,0
1,5
2,0
2,5
3,0
3,5
'13 '14 '15 '16 '17 '18 '19 '20 '21
US
UK
Forecast
0,0
0,5
1,0
1,5
2,0
2,5
3,0
3,5
'11 '12 '13 '14 '15 '16 '17 '18 '19 '20 '21 '22
Fed’s 2% target
3-year
avg.: 1.6%
Required 3-year
avg.: 2.4%
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