Investment Strategy
Is your portfolio ready for the coming year?
As the economy recovers, we believe that five forces will determine the path forward, both in Asia and globally. They are:
- The virus
- Government and central bank policy
- Inflation
- The U.S. Dollar
- Valuations
After an extraordinary, highly disruptive 2020, there are a number of positive signs on the horizon. Is your portfolio ready for the coming year?
This short video explainer features Alex Wolf, former U.S. State Department official and Head of Investment Strategy for Asia at J.P. Morgan Private Bank.
As we head into 2021 we believe the global economy will continue to heal. As the economy recovers we think five key forces will determine the path of recovery, both in Asia and globally: the virus, policy, inflation, the U.S. dollar, and equity valuations. In this video we'll explore each in a little more detail:
1. The virus: will it bring economic normalisation in 2021?
The good news is that a vaccine is already being distributed, but it’s still not clear how much of the global population will be vaccinated in 2021—due to personal choice, logistics or economic constraints.
Regardless, we believe a vaccine may not be a prerequisite for economic output to surpass pre-pandemic levels in certain sectors and regions. Even without a vaccine, there's been a rebound both in consumption and production activity globally. Consumer spending has simply shifted from sectors such as leisure and hospitality to housing and e-commerce and we think this recovery can continue.
2. Policy: Which governments and central banks will provide enough support?
In the U.S., we expect a very supportive mix of monetary and fiscal support. The Federal Reserve is already doing much to support growth; setting policy rates at zero, buying $120 billion worth bonds per month, and shifting toward an average inflation-targeting framework.
On the fiscal side, we expect another stimulus package, this time may worth around $1 trillion. Such a package—critical for the workers and businesses that are still suffering—would likely be enough to ensure the recovery continues.
For investors, the global policy stance is likely to be supportive for risk assets, but the differences in policy support may drive relative outcomes.
3. Inflation: Are prices going to rise too quickly, or too slowly?
Today, and for most of the past decade, the risk that prices won’t rise fast enough (or will actually fall) is more realistic than the threat that they will rise too fast. As a result, global central banks are actively trying to push inflation higher (by keeping interest rates low and buying assets to circulate more money through the economy), rather than trying to contain it.
We expect inflation to rise modestly over the next 12-18 months to just below 2% in the United States and around 1% in Europe – right where it was for most of the last cycle. That means that central banks will need to remain supportive for the foreseeable future to keep inflation expectations around their targets.
4. The U.S. dollar: will it continue to weaken?
The value of the U.S. dollar will be one of the most important things to watch in 2021, because it can give us a good sense of whether or not the global recovery is happening in the way that we expect it to. Indeed, the dollar has already depreciated: The U.S. Dollar index (DXY) is currently down about 11.5% since its peak on March 23rd of this year, and is down over 6.6% in year-over-year terms.
How much more can the U.S. dollar weaken? The dollar probably will weaken modestly against other currencies that make up the DXY index (like the Euro, Yen, and Pound), but it could weaken more against EM currencies like the Chinese Yuan, Mexican Peso, and Russian Ruble, as the global recovery continues. One of the strongest arguments for continued U.S. dollar weakness is that it has the most negative real rates of the major currencies that we track.
For investors, a weaker dollar has a few important implications:
Emerging markets are perhaps the biggest beneficiary of a weaker U.S. dollar. A weaker dollar improves financial conditions for EM and tends to drive flows into EM assets. U.S. equity earnings are also beneficiary: A weaker U.S. dollar is good for U.S. Large Cap equity earnings. And Commodities as commodity prices generally do well in a weak U.S. dollar environment.
5. Equities: are current valuations sustainable?
Most conventional metrics suggest global equities are expensive relative to their own history. However, we see several reasons why current valuations may be justified:
1. The largest companies in the world have healthy balance sheets and stable growth profiles.
Also, interest rates are low globally. Low interest rates support equity valuations in two ways: (1) the rate at which future earnings streams are discounted is low; and (2) equities look more attractive to investors on a relative basis because dividend, earnings and cash flow yields are much higher than fixed income yields.
3. Also, we believe there could be a “new normal” for equity valuations—as long as global central banks remain on hold and long-term interest rates remain near lows. Of course, a risk to this view would be an unexpected rise in interest rates.
All in all, you may not be getting a bargain for stocks, but we believe they may outperform cash and fixed income next year. Further, it’s also important to be selective, as the “new normal” may not apply to all regions and sectors equally. For this reason we favour Asia and the U.S. geographically, and areas of tech where we see long-term growth potential such as digitisation, health tech, and clean energy.
This will be our last video message in 2020 and from everyone at JP Morgan Private Bank I want to wish you all a very happy holidays and safe and healthy New Year.
As we head into 2021 we believe the global economy will continue to heal. As the economy recovers we think five key forces will determine the path of recovery, both in Asia and globally: the virus, policy, inflation, the U.S. dollar, and equity valuations. In this video we'll explore each in a little more detail:
1. The virus: will it bring economic normalisation in 2021?
The good news is that a vaccine is already being distributed, but it’s still not clear how much of the global population will be vaccinated in 2021—due to personal choice, logistics or economic constraints.
Regardless, we believe a vaccine may not be a prerequisite for economic output to surpass pre-pandemic levels in certain sectors and regions. Even without a vaccine, there's been a rebound both in consumption and production activity globally. Consumer spending has simply shifted from sectors such as leisure and hospitality to housing and e-commerce and we think this recovery can continue.
2. Policy: Which governments and central banks will provide enough support?
In the U.S., we expect a very supportive mix of monetary and fiscal support. The Federal Reserve is already doing much to support growth; setting policy rates at zero, buying $120 billion worth bonds per month, and shifting toward an average inflation-targeting framework.
On the fiscal side, we expect another stimulus package, this time may worth around $1 trillion. Such a package—critical for the workers and businesses that are still suffering—would likely be enough to ensure the recovery continues.
For investors, the global policy stance is likely to be supportive for risk assets, but the differences in policy support may drive relative outcomes.
3. Inflation: Are prices going to rise too quickly, or too slowly?
Today, and for most of the past decade, the risk that prices won’t rise fast enough (or will actually fall) is more realistic than the threat that they will rise too fast. As a result, global central banks are actively trying to push inflation higher (by keeping interest rates low and buying assets to circulate more money through the economy), rather than trying to contain it.
We expect inflation to rise modestly over the next 12-18 months to just below 2% in the United States and around 1% in Europe – right where it was for most of the last cycle. That means that central banks will need to remain supportive for the foreseeable future to keep inflation expectations around their targets.
4. The U.S. dollar: will it continue to weaken?
The value of the U.S. dollar will be one of the most important things to watch in 2021, because it can give us a good sense of whether or not the global recovery is happening in the way that we expect it to. Indeed, the dollar has already depreciated: The U.S. Dollar index (DXY) is currently down about 11.5% since its peak on March 23rd of this year, and is down over 6.6% in year-over-year terms.
How much more can the U.S. dollar weaken? The dollar probably will weaken modestly against other currencies that make up the DXY index (like the Euro, Yen, and Pound), but it could weaken more against EM currencies like the Chinese Yuan, Mexican Peso, and Russian Ruble, as the global recovery continues. One of the strongest arguments for continued U.S. dollar weakness is that it has the most negative real rates of the major currencies that we track.
For investors, a weaker dollar has a few important implications:
Emerging markets are perhaps the biggest beneficiary of a weaker U.S. dollar. A weaker dollar improves financial conditions for EM and tends to drive flows into EM assets. U.S. equity earnings are also beneficiary: A weaker U.S. dollar is good for U.S. Large Cap equity earnings. And Commodities as commodity prices generally do well in a weak U.S. dollar environment.
5. Equities: are current valuations sustainable?
Most conventional metrics suggest global equities are expensive relative to their own history. However, we see several reasons why current valuations may be justified:
- The largest companies in the world have healthy balance sheets and stable growth profiles.
- Also, interest rates are low globally. Low interest rates support equity valuations in two ways: (1) the rate at which future earnings streams are discounted is low; and (2) equities look more attractive to investors on a relative basis because dividend, earnings and cash flow yields are much higher than fixed income yields.
- Also, we believe there could be a “new normal” for equity valuations—as long as global central banks remain on hold and long-term interest rates remain near lows. Of course, a risk to this view would be an unexpected rise in interest rates.
All in all, you may not be getting a bargain for stocks, but we believe they may outperform cash and fixed income next year. Further, it’s also important to be selective, as the “new normal” may not apply to all regions and sectors equally. For this reason we favour Asia and the U.S. geographically, and areas of tech where we see long-term growth potential such as digitisation, health tech, and clean energy.
This will be our last video message in 2020 and from everyone at JP Morgan Private Bank I want to wish you all a very happy holidays and safe and healthy New Year.
