Quarterly Perspectives - J.P. Morgan Asset Management

Quarterly Perspectives



30 US fiscal policy

Theme overview

US equities: keeping a lid on expectations
  • US equities have rallied by more than 10% since the US Presidential election on the prospect of additional fiscal stimulus, tax cuts and deregulation, as well as an improvement in the broader economic environment.
  • There is scope for deregulation and lower business taxes under the Trump administration to improve the business climate, supporting US earnings and economic growth. However, implementing major tax cuts is easier said than done and any fiscal expansion is likely to come at the cost of higher borrowing and government debt.
  • The long-term growth outlook also looks challenging. The labour market has tightened, leaving further growth dependent on rising output per head, or productivity. This could constrain equity market returns relative to earlier stages of the cycle and to other markets.
  • However, a bear market looks unlikely in the short term, given the relatively low risk of a recession. Valuations are above their long-run average but are not at worryingly high levels.

Theme overview

Fixed income: investing in a rising rate realm
  • In July 2016, nearly 40% of global government bonds were trading at a yield of below zero. Now, only 23% have a negative yield and yields are expected to rise further as global growth, inflation and interest rates pick up.
  • This potential reversal, after decades of falling yields, raises challenges for fixed income investors and long-duration sovereign bonds , in particular. However, not every bond market has responded the same way. The yield on a 10-year US Treasury has risen 0.9% since the summer of 2016, while equivalent yields have risen 0.5% in Germany, 0.3% in the UK and 0.3% in the Japan.
  • At this pivotal time for fixed income markets, investors need to consider not just duration risk, but also the great variety of fixed income assets, some of which could actually benefit from rising rates.

62 Liquidity risks

18 Eurozone: GDP and inflation

Theme overview

European equities: "be greedy when others are fearful"
  • The European recovery looks healthier than in many years, but political risks have kept investors on the sidelines in advance of key elections.
  • However, the polls suggest that French political risk may be overstated. This could provide an attractive potential buying opportunity for European equities, as political downside risks subside.
  • Key to stronger European performance will be faster growth in earnings, which have disappointed for many years. Earnings expectations are now being revised up and companies are starting to deliver the growth required to drive returns higher.

Theme overview

Correlations down, dispersion up: what are market internals telling us?
  • Equity markets have been relatively stable so far in 2017, but under the surface, significant shifts are occurring.
  • Sector movements are playing an important role. Energy and materials stocks have rallied as commodity prices have risen. Financial stocks have surged on the back of reflation and policy hopes. Together these have driven significant dispersion in sector returns in most equity regions.
  • Correlations between stocks are also dropping, although this could end once sector movements settle.
  • These movements could indicate that investors are returning to stock-level differentiation as the macroeconomic worries of the post-crisis period fade.

60 Fixed income interest rate risk