Eye on the Market Outlook 2017

True Believers

by Michael Cembalest
Chairman of Market and Investment Strategy
J.P. Morgan Asset Management

Two groups of true believers are driving changes in the developed world. The first: single-minded central bankers who spent trillions of dollars pushing government bond yields close to zero (and below). While this unprecedented monetary experiment helped owners of stocks and real estate, its regressive nature did little to satisfy the second group: voters who are disenfranchised by globalization and automation, and who are on the march. What next? The fiscal experiments now begin (again). Prepare for another single-digit portfolio return year in 2017.

Eye on the Market: Outlook 2017
(Full Publication)

Executive Summary & Analysis by Region

Read   EOTM Outlook 2017: Executive Summary
  • Political upheavals and unorthodox central bank actions persist, but it looks like more of the same in 2017: single-digit returns on diversified investment portfolios as the global economic expansion bumps along for another year.
Read   United States: What will Trumpism look like in practice?
  • A modest growth boost from corporate tax cuts and deregulation, as Trump is only able to deliver on parts of his proposed agenda; tighter labor markets, a stronger dollar and higher interest rates cool things off in the latter half of the year.
Read   Europe: Modest recovery, underperforming corporate sector and a heavy political calendar
  • Ignore the politics for now, it’s the growth dynamics that constrain upside for investors; Europe should muddle along at 2% growth for another year, but is fundamentally changed compared to its pre-crisis self.
Read   Japan: Delusions of inflationary grandeur
  • Much ado about nothing: Abenomics is not delivering the goods. Japanese equities remain a one-trick pony linked to the fortunes of the Yen.
Read   China: Stabilization, courtesy of coordinated stimulus
  • After a blizzard of stimulus from multiple sources in 2015, China stabilized last year after consecutive years of weakening data. Markets are getting closer to pricing in the realities and constraints China now faces.
Read   Emerging markets ex-China: Recovering from balance of payment adjustments
  • Concerns about a rising dollar and protectionism are justified, but the sensitivity to a rising dollar has declined sharply since 2010 through restructuring and capital spending adjustments; buy on weakness in 2017.

Special Topics

Michael discusses the improving prospects for active management, the value of tax-aware investing, prudent use of leverage, and more.

What amount of leverage can survive a world of volatile markets? Now that the window for low-cost borrowing may be closing, we look at history and the future.

Active Management
The end of “peak central bank intervention” may reduce distortions and help active managers.

Rising U.S. natural gas prices due to large-scale U.S. LNG exports? Unlikely on both counts. What Dept. of Energy LNG export approvals mean, and what they don’t.

Tax Efficient Investing
How to simultaneously employ tax loss harvesting and generate market returns.

US infrastructure is dominated by municipal and Federal entities rather than by public-private partnerships. Why do PPPs get so much grief, and when should investors participate?

Clean Coal/CCS
The biggest problem with “clean coal”: scope. Infrastructure required to make carbon capture and storage a meaningful contributor is vastly underestimated.

Internet-based Business Models
How helpful have user growth metrics been in assessing new internet-based business models? Not very.

Commodity Prices
Markets are looking past inventory gluts given huge declines in capex; remembering the commodity surge of the 1970s and Richard Nixon.

Additional Insights

Private Bank Outlook 2017

Extended Recovery, Resilient Markets


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This material is for information purposes only.

The views, opinions, estimates and strategies expressed herein constitute Michael Cembalest’s judgment based on current market conditions and are subject to change without notice, and may differ from those expressed by other areas of J.P. Morgan. This information in no way constitutes J.P. Morgan Research and should not be treated as such. Any projected results and risks are based solely on hypothetical examples cited, and actual results and risks will vary depending on specific circumstances. We believe certain information contained in this material to be reliable but do not warrant its accuracy or completeness. We do not make any representation or warranty with regard to any computations, graphs, tables, diagrams or commentary in this material, which are provided for illustration/reference purposes only. Investors may get back less than they invested, and past performance is not a reliable indicator of future results. It is not possible to invest directly in an index. Forward looking, statements should not be considered as guarantees or predictions of future events.


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