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

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Key themes for 2020


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