JPM AM 2024 Outlook.pdf2523.1KB
Notes / Anything I Found Interesting:
- The difference between the earnings yield on stocks and corporate bonds is the lowest it has been in over 10 years
- Instead focus attention on quality stocks and income payers
- Big election year, 40% of world’s pop and GDP covered
- Taiwan in Jan, India in Apr, EU summer, US in November, UK by Dec 2024
- In 2024, however, limited fiscal headroom in both the US and the UK will likely make it difficult for any party to deliver further tax cuts or major spending programmes.
- Large deficits limit the prospects of fiscal giveaways
- As we look to 2024, we feel more confident that both short and long-term interest rates have peaked and that investors should take the opportunity to lock in yields on high-quality fixed income.
- Over the past 10 years, developed market equity earnings yields have on average been around 300 basis points higher than the yield available on developed market, BBB-rated corporate credit. Today, that gap is less than 30 basis points
- A rising yield environment typically favours value sectors over their longer duration growth counterparts, and this has played out in Europe, Japan and emerging markets. The US is the only major market where growth has beaten value this year, making the outperformance of megacap tech that much more remarkable but also raising some questions about the sustainability of this trend.
- European indices only generate 40% of their revenue domestically
- Conversely, for the US market to continue outperforming its European counterparts, the performance will heavily rely on the "super 7" largest stocks, which need to meet high earnings expectations.
- The FTSE 100 has the highest dividend yield of any developed market, UK stocks offer a relatively low beta to global stocks, and a high weight to the energy sector could prove a useful diversifier if higher oil prices challenge the disinflation narrative
- A softer landing for the economy is likely to benefit more cyclical regions such as Europe and emerging markets, while in the event of a deeper downturn, the more defensive characteristics of the UK market may come to the fore.
- Negative correlation between stock and bond prices has been a key pillar of portfolio construction for much of the past two decades. The resurgence of inflation flipped this relationship in 2022, with both bonds and equities losing ground as the market priced in higher policy rates to deal with ongoing price pressures. While inflation has declined substantially this year, stock/bond correlations have remained stubbornly positive, creating challenges for investors looking to build diversified portfolios.
- Looking ahead, we do expect the stock-bond correlation to return to negative territory in our base case scenario for the economy next year.
- We therefore see an increased role in portfolios for real assets, such as private infrastructure and timber. These asset classes historically have exhibited a low correlation to traditional assets, as 2022 demonstrated, and thus can often diversify against the inflation shocks that lead to periods of positive stock/bond correlation.
- If investors can get 4-5% with no risk of capital loss, why engage with stocks? And with no additional yield on offer from longer-term bonds, why is there any need to take on more interest rate risk?
- But today's cash rates are a mirage. They are likely to disappear as we get closer to a recession. If they stay high, it will be because the whole investment landscape has changed.
- Three scenarios where cash rates are bad. 1) first is soft-landing but inflation not troublesome - equities uplift, outperforming cash. 2) second is mild recession, central banks ease off, large cash allocation has reinvestment risk. 3) stagflation, cash rates higher, cash outperforms but inflation-protecting alt assets are outperform cash.
