Your Top 2024 Outlook Questions Answered

Author: Asia Investment Strategy Team
 

Over the past few weeks we have received dozens of questions from the hundreds of attendees at our Outlook roadshows across Asia. Generally, sentiment appears to be cautiously optimistic, and investors are broadly interested in increasing exposure to markets. However, concerns over China, simmering geopolitical risks and strong rallies in certain markets have led to some hesitation about deploying elevated cash allocations into investments.

In today’s note, we summarize some of the top questions across categories and address the key concerns that clients have expressed.

 

Our view: Election outcomes do not drive market outcomes in the long run.

Question: In the event of a Trump presidency, how could U.S. policy affect markets?

We are still early in the U.S. election cycle, but campaigns have already kicked off. While policy is unlikely to move markets this year, potential changes on the horizon such as additional tariffs and shifts in fiscal policy will likely have a more significant impact in 2025. In fact, there has been little difference in equity performance between election years and non-election years. For now, the key market drivers remain fundamentals: growth, inflation, and the Fed.

On monetary policy, we do not think the apolitical Fed is going to be influenced by political pressure to cut rates. Historically, election years have not affected their decisions (in fact, they have tended to raise rather than cut rates in those years).

However, even though long-term market outcomes are not influenced by elections, the path of markets throughout the year will likely become bumpier. Equity volatility tends to pick up in an election year around key primary dates and Election Day. Right now, equity volatility is low, so derivatives and str uctures can be effective ways to hedge some market exposure.

Our view: While off highs, still-elevated bond yields offer potential for income and a recession hedge.

Question: What are our thoughts on rising U.S. government debt levels, and what are the potential investment risks that investors should be mindful of?

While investors broadly agree that fixed income yields remain attractive, they harbor longer-term concerns over the fiscal path of the U.S., which is seeding worries about the sustainability of U.S. government debt. Indeed, ratings downgrades and pessimistic outlooks for government revenue and spending by the Congressional Budget Office (CBO) have led some investors to believe that the uncontrolled rise in the budget deficit could be responsible for pushing government debt to new all-time highs. By the mid-2030s, it is anticipated that the sum of federal revenues might be required to fund mandatory government spending alone.

So how could this impact markets? Historically, the currency has shouldered most of the burden of a sovereign fiscal crisis. We covered this topic in-depth here.

Real assets – such as core infrastructure – can play an important role as a portfolio diversifier and income source, with much lower volatility than Treasuries or equities. Historically, real assets have also performed well in times of dollar weakness, so investors can consider a strategic allocation to this asset class in order to hedge against the potential long-term tail risk of a fiscal crisis.

Our view: We anticipate new S&P 500 highs in 2024, driven by improving earnings.

Question: Given that the “Magnificent 7” large-cap tech names have driven much of the rally, why do you see continued outperformance?

While U.S. equities have rallied a lot, we do not think investors have necessarily “missed it”. Historically, investing at highs has not notably impacted returns, especially considering today’s environment  – where fundamentals are strong.

Indeed, the large-cap tech names are healthy, having delivered significant cash flows over the rest of the market, while trading at more attractive valuations on a price-to-earnings growth (PEG) perspective, courtesy of strong expected growth in the future. From recent earnings calls, we note that capex spend on AI is increasing, and cloud-related software spend and revenues are accelerating – helping to provide further uplift to related names and sectors.

However, given the magnitude of the rally, now is a good time to focus on alpha over beta, and we are selective within the “Magnificent 7” and sectors in the S&P 500. Structured products are also an effective way to get attractive upside participation with some downside hedging.
 

Our view: Investors can close their structural underweights to Japanese equities, and we are constructive on buying dips in that market.

Question: Can Japan sustain its impressive stock market performance?

2023 was one of the best years on record for Japanese equities, and the index is close to all-time highs. However, recent weakness in global manufacturing purchasing managers’ indexes (PMIs) has started to negatively impact corporate earnings, even though the weak yen has helped cushion the net impact. Japanese corporate earnings have historically been correlated to global manufacturing PMIs, and they have been diverging with the earnings revision trend. This bears close attention and underpins our relatively neutral stance on the broad index from a cyclical perspective.

However, Japan’s reflation is potentially game-changing in the medium to longer-term. Japan’s nominal growth has recently exceeded China’s for the first time in many decades, which matters for equity earnings. There are also emerging trends that imply a sustained return of inflation, such as a potentially greater focus on expanding domestic capex and further room for consumption to recover to pre-Covid trends.

A longer term theme that is increasingly capturing market interest is the progress of corporate reform in Japan. As a result of regulatory reforms and new Tokyo Stock Exchange (TSE) ‘name-and-shame’ initiatives for companies trading below book value, Japanese corporates are increasingly returning more cash to shareholders in the form of increased dividends and share buybacks. We are positive on such emerging themes over the broader market.

We wrote extensively on our outlook on Asia, including Japan, here.
 

Our view: China’s property slowdown is structural and could weigh on growth for some time.

Question: Why is China’s real estate industry dragging down growth?

China’s broader property sector was one of the largest in the world, and made up around 30% of GDP. The sector was rife with problems – such as bubbly prices, excess supply and indebted developers struggling to meet liabilities and presale obligations. 

As those issues unwind and building activity slows down – along with declining expectations for future prices – the broad deleveraging of the property sector could take some years before it finds an equilibrium, leading to structurally lower growth – as evidenced by historical examples of debt booms and busts.

Besides impacting related sectors like construction, consumer sentiment and consumption could continue to be weighed down through a negative wealth effect. We are around two years into this process, but nominal growth will likely continue to be pressured in the meantime. China is also in outright deflation, compounding this negative sentiment. With nominal growth now lower than that of the U.S. and Japan, equity earnings are also under pressure.

We cover China’s real estate woes extensively in our 2024 China Outlook here.

 

Our view: Chinese equities have had a long-term earnings problem, and the equity market has not reflected strong GDP growth.

Question: What are the reasons that Chinese earnings have not kept up with growth?

While China’s GDP has expanded multiple times over the past decades, equity earnings have not grown in over ten years and markets have been flat. As such, investors buying China to gain exposure to its rapid GDP growth have not necessarily been rewarded as public equity shareholders.

There are many reasons for this divergence, but one of the key factors could be share dilution, where companies rely extensively on equity financing such as private placements and share issuance. On an earnings per share (EPS) basis, those actions dilute earnings. The equity market could also be a poor reflection of the real economy. One example – real estate makes up 30% of GDP but less than 3% of the MSCI China Index.

We look deeper into Chinese equities in our 2024 China Outlook here.

 

Our view: India is one of our most favored equity markets for the long-term.

Question: India looks appealing, but has the equity market rallied too much already?

While the lack of correlation between equities and growth appears shocking, this is not unique among emerging markets (EM). However, one market where earnings, equities and GDP growth are closely related, is India. India is also one of the best performing markets over a long time horizon, even accounting for currency depreciation.

If the assumption that India could continue to deliver high rates of GDP growth holds true, and this relationship with the equity market stays consistent, India could continue to deliver mid-teens earnings growth.

In the near-term, we acknowledge Indian equities are not undervalued. Stocks trade at forward price-to-earnings (P/E) multiples that are higher than their historical averages. Another potential risk is the general election expected to take place in April or May. However, recent state elections results were much better than exit polls suggested and bode well for continued economic reform, a pro-business environment, and stability in India under Prime Minister Modi’s administration. We would add exposure on dips induced by headline risks on this front.

We detail our views on India in our 2024 Asia Outlook here.

Our view: Higher base rates, wide spreads and protective loan covenants can support attractive
private credit returns in 2024 and beyond.

Question: What is the default risk in direct lending?

Even a soft landing for the economy entails a growth slowdown. In such a scenario, credit defaults are likely to pick up. However, we believe investors are well-compensated for that risk in direct lending, and high spreads can make up for some defaults. With yields in the 10-12% range, assuming a negative scenario of a 10% default rate with a conservative 50% recovery rate, the downside is around six months of coupons, which in our view is a moderate and manageable risk. Protective loan covenants and seniority in the capital stack, managed by world-class managers, could also mitigate some of these risks.

Even with a slowing growth outlook and a pickup in defaults, investors could still see attractive returns in direct lending, making it an attractive complement to traditional fixed income allocations as a higher-yielding asset even relative to leveraged loans and high yield credit.

All market and economic data as of February 08, 2024 and sourced from Bloomberg Finance L.P. and FactSet unless otherwise stated.

For illustrative purposes only. Estimates, forecasts and comparisons are as of the dates stated in the material.

There can be no assurance that any or all of these professionals will remain with the firm or that past performance or success of any such professional serves as an indicator of the portfolio’s success.

We believe the information contained in this material to be reliable but do not warrant its accuracy or completeness. Opinions, estimates, and investment strategies and views expressed in this document constitute our judgment based on current market conditions and are subject to change without notice.

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Indices are not investment products and may not be considered for investment.

For illustrative purposes only. This does not reflect the performance of any specific investment scenario and does not take into account various other factors which may impact actual performance.

Past performance is not a guarantee of future results.  It is not possible to invest directly in an index.

Structured product involves derivatives. Do not invest in it unless you fully understand and are willing to assume the risks associated with it.  The most common risks include, but are not limited to, risk of adverse or unanticipated market developments, issuer credit quality risk, risk of lack of uniform standard pricing, risk of adverse events involving any underlying reference obligations, risk of high volatility, risk of illiquidity/little to no secondary market, and conflicts of interest. Before investing in a structured product, investors should review the accompanying offering document, prospectus or prospectus supplement to understand the actual terms and key risks associated with the each individual structured product. Any payments on a structured product are subject to the credit risk of the issuer and/or guarantor. Investors may lose their entire investment, i.e., incur an unlimited loss. The risks listed above are not complete. For a more comprehensive list of the risks involved with this particular product, please speak to your J.P. Morgan representative. If you are in any doubt about the risks involved in the product, you may clarify with the intermediary or seek independent professional advice.

These are presented for illustrative purposes only. Your actual portfolio will be constructed based upon investments for which you are eligible and based upon your personal investment requirements and circumstances. Consult your J.P. Morgan representative regarding the minimum asset size necessary to fully implement these allocations. 

Past performance is not a guarantee of future results. It is not possible to invest directly in an index.

RISK CONSIDERATIONS 

• Past Performance is not indicative of future results. It is not possible to invest directly in an index.
• The prices and rates of return are indicative as they may vary over time based on market conditions. 
• Additional risk considerations exist for all strategies. 
• The information provided herein is not intended as a recommendation of or an offer or solicitation to purchase or sell any investment product or service. 
• Opinions expressed herein may differ from the opinions expressed by other areas of J.P. Morgan. This material should not be regarded as investment research or a J.P. Morgan investment research report.

 

Index definitions

Standard and Poor’s 500 Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The index was developed with a base level of 10 for the 1941–43 base period.

The MSCI World Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets. The index consists of 23 developed market country indexes.

The Bloomberg Global Aggregate Index provides a broad-based measure of the global investment grade fixed-rate debt markets. The Global Aggregate Index contains three major components: the U.S. Aggregate (USD 300mn), the Pan-European Aggregate (EUR 300mn), and the Asian-Pacific Aggregate Index (JPY 35bn). In addition to securities from these three benchmarks (94.1% of the overall Global Aggregate market value as of December 31, 2009), the Global Aggregate Index includes Global Treasury, Eurodollar (USD 300mn), Euro-Yen (JPY 25bn), Canadian (USD 300mn equivalent), and Investment Grade 144A (USD 300mn) index-eligible securities not already in the three regional aggregate indices. The Global Aggregate Index family includes a wide range of standard and customized subindices by liquidity constraint, sector, quality, and maturity. A component of the Multiverse Index, the Global Aggregate Index was created in 1999, with index history backfilled to January 1, 1990. All indices are denominated in U.S. dollars.

The NCREIF Index - Open End Diversified Core Equity (NFI-ODCE), is an index of investment returns of the largest private real estate funds pursuing lower risk investment strategies utilizing low leverage and generally represented by equity ownership positions in stable U.S. operating properties diversified across regions and property types. The NFI-ODCE (pronounced as “odyssey”) has been widely used since 1978 to track institutional core private real estate returns.

The MSCI China Index captures large and mid cap representation across China A shares, H shares, B shares, Red chips, P chips and foreign listings (e.g. ADRs). With 740 constituents, the index covers about 85% of this China equity universe. Currently, the index includes Large Cap A and Mid Cap A shares represented at 20% of their free float adjusted market capitalization.

TOPIX Index: It is a metric for stock prices on the Tokyo Stock Exchange (TSE). It is a capitalization-weighted index that lists all firms in the "first section" of the TSE, a section that organizes all large firms on the exchange into one group. The second section of the TSE pools all of the smaller remaining companies.

MSCI India Index: Measures the performance of the large and mid-cap segments of the Indian market. With 113 constituents, the index covers approximately 85% of the Indian equity universe.

CSI 300 Index: A capitalization-weighted stock market index designed to replicate the performance of the top 300 stocks traded on the Shanghai Stock Exchange and the Shenzhen Stock Exchange.

Stoxx Europe 600 Index: covering the 600 largest companies in Europe, reflects the exposure to a certain sector in terms of free-float market capitalization.

MSCI Asia ex-Japan Index: Captures large and mid-cap representation across 2 of 3 Developed Markets countries (excluding Japan) and 8 Emerging Markets countries in Asia. With 1,184 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country. Developed Markets countries in the index include Hong Kong and Singapore. Emerging Markets countries include China, India, Indonesia, Korea, Malaysia, the Philippines, Taiwan and Thailand.

The Bovespa Index, best known as Ibovespa is the benchmark index of about 86 stocks traded on the B3, accounting for the majority of trading and market capitalization in the Brazilian stock market. It is a weighted measurement index.

Hang Seng Index: is a free float-adjusted market-capitalization-weighted stock-market index in Hong Kong. It is used to record and monitor daily changes of the largest companies of the Hong Kong stock market and is the main indicator of the overall market performance in Hong Kong.

The BSE SENSEX is a free-float market-weighted stock market index of 30 well-established and financially sound companies listed on the Bombay Stock Exchange.

The Jakarta Composite Index is a modified capitalization-weighted index of all stocks listed on the regular board of the Indonesia Stock Exchange.

The FTSE Bursa Malaysia Index comprises of the largest 30 companies by full market capitalization on Bursa Malaysia's Main Board.

The S&P/BMV IPC Index seeks to measure the performance of the largest and most liquid stocks listed on the Bolsa Mexicana de Valores.

The Straits Times Index (STI) is a market capitalisation weighted index that tracks the performance of the top 30 companies listed on SGX.

The FTSE/JSE Top 40 Index consists of the largest 40 companies ranked by investable market value in the FTSE/JSE All-Share Index.

The Korea Composite Stock Price Index or KOSPI is the index of all common stocks traded on the Stock Market Division—previously, Korea Stock Exchange—of the Korea Exchange.