Quarterly Perspectives - J.P. Morgan Asset Management

Quarterly Perspectives



71 Commodities

Theme overview

Higher commodity prices: implications for the economy and markets
  • There was an uptick in many commodity prices over the course of 2017; oil in dollar terms rose 14% this year. This largely reflects an improvement in the prospects for global demand.
  • This will support the commodity producers and is one of the reasons we have become more optimistic about emerging economies in 2018.
  • With unemployment low in much of the developed world, it is possible that higher oil prices will encourage workers to request higher pay. Central banks assume that inflation will pick up only gradually. If wage growth were to pick up more swiftly, the central banks might feel under pressure to normalise policy more quickly.

Theme overview

The myths and realities of the Chinese economy
  • Markets can be fickle, turning from pessimism to euphoria on a sixpence. But nowhere has the consensus lurched so wildly in recent years than on the forecast for China.
  • These swings can be put down to two sources of confusion. The first is confusion about the inner workings of the Chinese economy itself and how it differs from that of the West.
  • The second is confusion between the structural outlook for the Chinese economy and cyclical changes.

32 Emerging market structural dynamics

36 Relative equity earnings and valutations

Theme overview

Are equity valuations a reason to sell?
  • Despite the strong rally in equity markets over 2017, valuations have not changed much since the start of 2017 in Europe, the UK and Japan, as earnings have grown strongly.
  • Only EM and the US have seen valuations creep higher as share prices rose by more than earnings expectations. With emerging market (EM) valuations starting from a low base, only US valuations look somewhat expensive compared with their long-run average.
  • While US valuations certainly are not cheap, continued strong economic and earnings growth should help to support further gains for US equities, along with other less expensive equity markets.

Theme overview

Eurozone: growth strengthening, risks diminishing
  • Many economies surprised to the upside in 2017, but the eurozone was a star performer. In the third quarter, the annual rate of GDP growth accelerated to 2.6%.
  • The manufacturing purchasing managers’ index (PMI) for the eurozone hit a new record high of 60.6 in December, which is consistent with the annual pace of growth remaining above 2.5%.
  • Consumer spending has underpinned the recovery as strong gains in employment have pushed consumer confidence to a record high. The European Central Bank (ECB) remains concerned about low inflation and is likely to keep monetary conditions loose for some time.

37 Europe ex-UK equities: Macro correlations