Investment outlook 2020: Market risks - J.P. Morgan Asset Management

Investment outlook 2020: Market risks

Contributors Karen Ward, Ambrose Crofton
Valuation and market headwinds


Risk assets appear to be taking an optimistic view of the world. Most markets have recovered the declines seen late in 2018.

At the same time, earnings have stagnated in most geographies. As a result, valuations, on a forward price-to-earnings basis, are considerably less supportive than they were as we entered 2019, and credit spreads considerably tighter (see below).

Equity and credit market valuations

Global forward price-to-earnings ratios
x, multiple
Fixed income spreads
% option-adjusted spread

Source: (Left) IBES, MSCI, Refinitiv Datastream, Standard & Poor’s, J.P. Morgan Asset Management. MSCI indices are used for all regions/countries, except for the US, which is represented by the S&P 500. (Right) Bloomberg Barclays, BofA/Merrill Lynch, Refinitiv Datastream, J.P. Morgan Economic Research, J.P. Morgan Asset Management. Euro IG: Bloomberg Barclays Euro Agg. – Corporate; US IG: Bloomberg Barclays US Agg. Corporate – Investment Grade; UK IG: Bloomberg Barclays Sterling Agg.– Corporates; Euro HY: BofA/Merrill Lynch Euro Non-Financial High Yield Constrained; US HY: BofA/Merrill Lynch US High Yield Constrained; EM sovereign (USD): J.P. Morgan EMBI Global. *Ranges and averages are from the beginning of 1998, except for Euro IG and US HY, which are from November 1998 and January 2000, respectively. Past performance is not a reliable indicator of current and future results. Guide to the Markets - UK. Data as of 25 November 2019.

Is earnings growth likely to reaccelerate in 2020? We struggle to see it. Our overall assessment is that corporate earnings will hold up in 2020 in most major regions, but we shouldn’t expect too much growth. A key global problem is that tight labour markets are pushing up wage costs, but companies still have little top-line growth as pricing power remains elusive in most industries. As a result, margins are under pressure (see below).

S&P 500 earnings per share growth breakdown

% change year on year, EPS estimates over next 12 months

Source: IBES, Refinitiv Datastream, Standard & Poor’s, J.P. Morgan Asset Management. EPS is earnings per share. Earnings growth breakdown is calculated using IBES consensus estimates for next 12 months’ EPS. Past performance is not a reliable indicator of current and future results. Data as of 25 November 2019.

The risks to this outlook for earnings appear broadly balanced. A re-escalation in trade tensions or margin pressures may lead firms to cut jobs, and the global economy could take a turn for the worse. But we are also mindful that the higher wages that have been squeezing profits in 2019 could in turn lead to higher sales. Declining interest rates may also help ease margin pressures and boost sales. This prevents us from getting overly bearish.



Key themes for 2020

Important information

This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature or other purpose in any jurisdiction, nor is it a commitment from J.P. Morgan Asset Management or any of its subsidiaries to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical and for illustration purposes only. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and determine, together with their own professional advisers, if any investment mentioned herein is believed to be suitable to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yields is not a reliable indicator of current and future results.

J.P. Morgan Asset Management is the brand for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. This communication is issued in the United Kingdom by JPMorgan Asset Management (UK) Limited, which is authorized and regulated by the Financial Conduct Authority, Registered in England No. 01161446. Registered address: 25 Bank Street, Canary Wharf, London E14 5JP.