Prepared for challenges, focused on opportunity
OUTLOOK 2020
INVESTMENT AND INSURANCE PRODUCTS ARE: • NOT FDIC INSURED • NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY • NOT A DEPOSIT OR OTHER OBLIGATION OF, OR GUARANTEED BY, JPMORGAN CHASE BANK, N.A. OR ANY OF ITS AFFILIATES •
SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED
The theme of this year’s outlook is focus. Amid a swirl of uncertainty about the sustainability of the
economic cycle, politics and geopolitics, it is easy to get distracted from what is important. In this
outlook, we hone in on what we believe will be the most important variables in defining investment
performance in 2020, and beyond.
There will be no shortage of challenges in 2020. The U.S. presidential election could have important
policy, market and planning implications, while the ongoing trade dispute has raised questions about
the future of globalization, supply chains and corporate profits. Investors will also grapple with an
investment landscape that feels starved for yield and growth, both important foundations for long-
term investment portfolios.
Despite these challenges, we expect 2020 to be another year of positive growth. The global
manufacturing skid appears to be finding its footing, the American consumer is healthy, and the Federal
Reserve’s pivot has breathed new life into the economic cycle and buoyed risk assets around the world.
At J.P. Morgan, we feel well positioned for this environment. Over the last two years, we have prepared
portfolios for late-cycle challenges by substantially reducing overweights to equities and high yield
credit, and increasing exposure to core bonds, dividend growers and other diversifiers. At the same
time, we are focused on opportunities and maintain a modest overweight to equities headed into 2020,
as we believe stocks will outperform bonds.
Finally, in exploring this year’s outlook, we encourage you to contextualize our market views through
the lens of your own goals. Consider the purpose, time horizon and priority level of your investments.
Money intended for a near-term down payment on a new home should be considered differently than
long-term money that is intended to grow over many generations. Understanding the purpose of an
investment can sharpen the focus of how the capital should be allocated, and allow you to rise above
the noise of an uncertain environment to make more confident and intentional decisions.
We look forward to continuing our dialogue with you throughout the year.
Andrew D. GoldbergGlobal Head of Market Strategy and Advice J.P. Morgan Private Bank
PREPARED FOR CHALLENGES, FOCUSED ON OPPORTUNITY | 1
Our top conclusions from this outlook:
We don’t see a recession in 2020.
Despite the risks, we believe the economy will
continue to grow in 2020, avoiding recession for an
11th year. Manufacturing is stabilizing, the consumer
is strong, and the Fed’s pivot has breathed new life
into the cycle.
We believe stocks will outperform bonds
in 2020.
Our portfolios maintain a modest overweight to
stocks. The United States is our preferred region
for its mix of upside return potential and relative
stability, should conditions worsen.
Central banks appear powerless to spur
economic growth.
Ultra-low interest rates have supported asset prices,
but have starved investors for yield. To augment
portfolio yield, we are looking to dividend growth
equities, real estate and preferred equity.
We prefer core bonds to cash.
Despite low (even negative) yields, we believe core
bonds provide a valuable buffer in the event of an
unexpected downturn. We also prefer core bonds to
cash, as bonds tend to outperform cash in adverse
market conditions.
Trade war and the 2020 election are not
enough to derail your plan.
Binary wildcards like the trade war and upcoming
election deserve respect and can be important
market catalysts. But our portfolios are positioned
defensively across our platform, owing in part to
these risks. As we develop clarity on which proposals
will become actual policies, we will continuously
reassess as we monitor for winners and losers
related to both.
What should investors be doing?
Find growth in a low-growth world.
We are excited about the opportunities
presented by certain disruptive secular
growth trends. We think investors should
consider investment opportunities
related to the global digital buildout,
next-generation vehicles, 5G network
infrastructure and the growing
importance of cybersecurity.
Harvest yield.
Currently, more than 20% of investment-
grade debt in the world trades with a
negative yield, and central banks seem
poised to keep rates low. Investors may
want to consider alternative sources for
income, such as real estate, preferred
equities and dividend-paying stocks.
Invest through uncertainty.
We are prepared for challenges. Across
our platform, we have taken many
steps to reduce portfolio risk, including
a substantial reduction to our equity
overweights and high yield bonds, and
increased exposure to core fixed income.
We remain attentive to quality and
liquidity in portfolios—both important
factors when the going gets tough.
2 |
How credible is the case for recession?The business cycle (the most important driver of markets) is at an
inflection point. It is clear that the manufacturing sector is going
through what is effectively a recession. Meanwhile, the yield curve
(historically a reliable indicator of recession) briefly inverted over
the summer, and the Fed’s pivot is a tacit admission that it raised
interest rates too far in 2018. CEO confidence is at its lowest levels
since 2009, and all of this is happening in the 11th year of an
economic expansion.
SECTION 1
0.5
1.0
1.5
2.0
2.5
3.0%
Jan. ’15 May ’16 Sep. ’17 Feb. ’19 Jun. ’20
Fed funds rate
Current market expectations
Market expectations in Oct. 2018
-1
0
1
2
3%
Recession 10–2 year spread
’85 ’87 ’89 ’91 ’93 ’95 ’97 ’99 ’01 ’03 ’05 ’07 ’13 ’15 ’17 ’19’09 ’11
The macro outlook: The expansion should continue through another year
THE U.S. YIELD CURVE INVERTED BRIEFLY IN 2019Spread between longer-dated and shorter-dated Treasuries
Source: FactSet. November 29, 2019.
THE FED RISKED GOING TOO FAR, BUT THE PIVOT CHANGES THINGSFederal funds rate
Because of these risks, we have taken many steps to prepare portfolios for slower growth. We have reduced our overweight to equities and concentrated
that exposure in the United States. We removed allocations to high
yield bonds and shifted toward core fixed income (like Treasury
bonds and other investment-grade issues). We continue to focus
on quality and liquidity—both of which could help in a downturn.
Even though a recession did not materialize, these changes were
valuable in a world of sideways equity markets and declining
interest rates.
Source: Bloomberg Financial L.P. November 29, 2019.
PREPARED FOR CHALLENGES, FOCUSED ON OPPORTUNITY | 3
The case for recession might seem strong, but we believe the U.S. economy will continue to grow in 2020. After a brief manufacturing boom in 2016 and 2017, the onset of
the trade war in early 2018 cooled things down. This left businesses
with large inventory stockpiles that will need to be worked through
before manufacturing activity picks up again. This cycle is showing
signs of finding a bottom, and there is evidence that inventories in
important categories like semiconductors are being drawn down.
Because of this, we think it is more likely that the manufacturing
weakness is part of a smaller inventory cycle than a harbinger of
broad-based recession.
Perhaps more importantly, the Federal Reserve’s pivot from raising
rates to lowering them all but ensures that interest rates will not
become too restrictive in the near term. We are also encouraged
that the much larger services and consumption sectors of the
economy have been resilient. The labor market has held up well,
the financial system seems well capitalized, and households and
corporations are still borrowing (albeit at a slow pace).
The biggest risk to our view is that the lack of corporate confidence
results in retrenchment. If companies are so nervous about the
outlook and declining margins that reduce capital expenditures, or
lay off workers pre-emptively, that could catalyze a negative spiral
into the broader economy. However, we think it is more likely that
the positive support from continued demand should be enough
to offset the negative from high uncertainty. Barring a shock,1 we
think the U.S. economic expansion should continue in 2020, with
real GDP growth settling toward its longer-term trend pace of
1.5–2%.
1The most likely epicenter of a shock seems like it would be from markets themselves. Further escalation in the trade conflict between the United States and China, for example, could catalyze a selloff that transmits to the real economy through both the wealth effect (consumers feel less wealthy) and corporate confidence. There was also some turbulence this year when many private “unicorns” had uninspiring or canceled IPOs, but it doesn’t seem like that disturbance will be enough to influence the entire economy.
> Barring a shock,1 we think the U.S. economic expansion should continue in 2020, with real GDP growth settling toward its longer-term trend pace of 1.5–2%.
4 |
2To be clear, while equities don’t seem frothy, they are certainly not pricing in a full-blown recession either. In that scenario, it wouldn’t be outlandish to expect somewhere between a 20% and 30% decline at the headline level if multiples fell to ~14x and earnings contracted by ~20% (both reasonable assumptions for a recession). 3Developed world equities outside of the United States are still well below their January 2018 highs. 4There are a few explanations for this relationship. For one, equities valuations are theoretically the discounted value of all future cash flows. As current interest rates decline, so too do discount rates. Lower discount rates result in higher valuations of future cash flows. Also, fixed income becomes less competitive with equities on a forward-looking basis, which encourages investors to buy equities on the margin.
> We believe equities are priced appropriately for a world of slow economic and earnings growth, and low interest rates and inflation.2
What are we expecting from equity markets? Oftentimes, when investors ask about the likelihood of a recession,
what they really want to know is if risk assets are going to decline
substantially in value. With the S&P 500 near all-time highs (and
global stocks up over 20% in 2019), it may seem like equities are
vulnerable and complacent. However, we do not believe equity
markets are ignorant about the global economic slowdown.
Much of the strong return in 2019 was merely a reversal of the
20% decline from peak to trough in the fourth quarter of 2018.
Since the end of January 2018, when global manufacturing activity
peaked and the trade dispute began, global equities have gone
sideways—not straight up.
Global Manufacturing PMI(50+ = expansion)
Global Manufacturing PMI
Cyclicals relative to defensives
Cyclicals/Defensives(Jan. 1, ’16 = 100)
55 130125120
1101051009590
115
48
49
50
51
52
53
54
Jan. ’16 Jul. ’16 Jan. ’17 Jul. ’17 Jan. ’18 Jul. ’18 Jan. ’19 Jul. ’19
Under the surface, the equity market response to the global
slowdown is even more pronounced. Cyclical stocks (those that
are most sensitive to changes in economic activity, like industrials)
have underperformed their defensive counterparts (like utilities)
by more than 20%. And where there has been strength, it has
been justified. The strong returns from the technology sector, for
example, seem predicated on a stronger earnings outlook than the
market as a whole. We believe that equities are priced more or less
appropriately for a world of slow economic and earnings growth,
and low interest rates and inflation.2
2020 could well be a year where stabilization in manufacturing
could allow emerging market (EM) and European stocks to keep
pace with those in the United States. Earnings expectations outside
of the United States seem to be bottoming, which would be a
welcome sign for the markets that have been hit particularly hard
by the manufacturing slowdown and the trade war (like Korea and
Germany).3 Despite these encouraging prospects, we continue to
favor the United States, which should provide exposure to upside
as the global economy stabilizes, while offering better downside
protection if we are wrong.
Next year, we think earnings globally will grow by mid-to-high-
single digits, which suggests mid-to-high-single digit returns for
stocks. For equities to rise much more than that, valuations would
have to rise. There is a powerful case that this could happen. The
decline in interest rates in 2019 was a large support to equities,4
but we believe it was offset by rising economic and policy
uncertainty. If the political uncertainty abates, and economic data
stabilizes, we would expect valuations to expand.
CYCLICAL EQUITIES UNDERPERFORMED AS PMIs FELL
Source: Bloomberg Financial L.P., Goldman Sachs, Markit, J.P. Morgan. November 29, 2019.
PREPARED FOR CHALLENGES, FOCUSED ON OPPORTUNITY | 5
150
90
100
110
120
130
140
Jan. ’16 Jul. ’16 Jan. ’17 Jul. ’17 Jan. ’18 Jul. ’18 Jan. ’19 Jul. ’19 United States EM Europe Japan China
EARNINGS GROWTH HAS STALLED IN THE UNITED STATES AND DECLINED EVERYWHERE ELSENext 12-month earnings per share expectations, Jan. 2016 = 100
Source: FactSet, MSCI, S&P. November 29, 2019.
> If the political uncertainty abates, and economic data stabilizes, we would expect valuations to expand.
6 |
The region’s issues are not just because of the trade war. China’s slowdown has been underappreciated in terms of both magnitude and breadth. The pace of growth across industrial production, capital expenditures, corporate profits and consumption has slowed to rates not seen since the near-recession in 2014.
PREPARED FOR CHALLENGES, FOCUSED ON OPPORTUNITY | 7
Not the recoveries of old
2019 came and went with very little progress on the U.S.-China
trade war and still few signs of any cyclical improvement in China.
Will 2020 be any different? Unfortunately, we think it will be more
of the same. Few signs of material progress in trade talks raise the
likelihood of U.S.-China trade barriers becoming a new normal. And
China’s tepid stimulus may be enough to stabilize growth, albeit
at levels far weaker than the region has become accustomed to.
Though there are few reasons to expect a material improvement,
reduced tail risks around trade escalation and the declining
negative impact from uncertainty and supply chain redirection
should abate, allowing for a moderate recovery.
We have to start with the trade war. We expect an extended
stalemate on the trade front, meaning no further escalation in
tariffs but no meaningful reduction in existing tariffs. A trade
stalemate can reverse the slowing growth trend and create the
conditions for a mild regional recovery. The negative impact
of trade tensions was felt through weaker exports, but more
importantly uncertainty, which weighed on sentiment, corporate
spending and consumption. A trade truce, even if it’s a narrow
deal focused only on agricultural products, could reverse these
conditions and also lend more tailwinds to policy easing, the
effectiveness of which has been hampered by uncertainty. That
said, any truce will likely be fragile, and risks of further tensions
will be persistent.
The region’s issues are not just because of the trade war. China’s
slowdown has been underappreciated in terms of both magnitude
and breadth. The pace of growth across industrial production,
capex, corporate profits and consumption has slowed to rates
not seen since the near-recession in 2014. While official data
has exhibited an uncanny smoothness, the proxy indicators of
production volumes, government tax revenues and partner trade
data display the depths of the current slowdown. This weakness has
negatively impacted its key trading partners, such as South Korea.
On the bright side, stimulus measures to boost infrastructure
investment are beginning to show some impact, helping to boost
commodity demand, particularly from Australia.
We continue to highlight that while the trade war has dampened
overall growth in Asia, we are focused on relative winners and
losers. The trade war has redirected supply chains and export
demand, boosting exports from Vietnam and Taiwan as U.S.
demand shifts away from China. Likewise, Chinese agricultural and
energy purchases have shifted away from the United States and
toward Australia and Brazil. A trade truce could unwind some of the
effects, but the movement of supply chains across the region will
likely continue to the benefit of low-cost producers.
Lastly, regional central banks have taken advantage of structurally
lower inflation and a stable U.S. dollar environment to cut interest
rates. In addition we’ve seen some nascent moves toward fiscal
stimulus, particularly in South Korea. Uncertainty from the trade
war depressed the impact from stimulus over 2019, but if a truce
between the United States and China holds, the impact of easing
will be more broadly felt.
On a country-by-country basis, we expect growth in India to
improve as the negative shocks from weak external demand and
the non-bank financing crisis dissipate; China will continue to
slow cyclically and structurally as the growth model adjusts under
increasingly limited stimulus capacity; growth in Japan will remain
sluggish following the consumption tax hike; and ASEAN economies
will benefit from supply chain redirection and continued growth in
consumption as policy turns more supportive.
Asia Spotlight
8 |
Almost every central bank in the world is now lowering interest
rates (or has negative rates), and the European Central Bank (ECB)
has restarted its asset purchase program. This shift has arguably
helped stave off a true recession, but we worry that central banks
no longer have enough firepower to generate a broad-based
cyclical reacceleration.
A decade defined by monetary policy is ending
What more can central banks do?Global central banks dominated the investment landscape in the
2010s, expanding their balance sheets by over $12 trillion since
the financial crisis. Given this, it comes as no surprise that central
banks have already reacted to the most recent growth slowdown
so swiftly.
-30
-20
-10
0
10
20
30
40
Global easing
Global tightening
’05 ’06 ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 ’17 ’18 ’19
SECTION 2
GLOBAL CENTRAL BANKS ARE NOW DECISIVELY EASING TO STIMULATE ACTIVITYNet number of central banks whose last move was a cut or that have negative rates
Source: Eye on the Market, J.P. Morgan Asset Management, country central banks,Bloomberg Financial L.P. November 29, 2019.
PREPARED FOR CHALLENGES, FOCUSED ON OPPORTUNITY | 9
One of the most powerful ways that monetary policy can stimulate
the real economy is by setting borrowing costs at a lower level
than the expected returns on investment. This ought to encourage
borrowing by businesses and individuals to make new investments
(whether that is in a new factory or a new house). But despite
aggressive action from central banks, new borrowing has barely
reached levels that would have marked cyclical troughs in the past.
To us, it is clear that monetary policy isn’t working as effectively as
it has historically.
’70 ’75 ’80 ’85 ’90 ’95 ’00 ’05 ’10 ’15
1214%
108642
-2-4-6
0Current growth rate
Includes all household and non-financial corporate borrowing
Recession
> This suggests that easy policy from central banks globally should continue to be supportive of asset prices, but that the global economy needs a boost from somewhere else to reaccelerate.
U.S. DEBT GROWTH IS LEVELING OFF NEAR PREVIOUS TROUGHSEconomy-wide borrowing per quarter as % GDP
Source: Federal Reserve, BEA, Haver Analytics, JPMPB Strategy. Q2 2019.
Now, policy rates in Japan and the Eurozone are at or below
zero already, and the Federal Reserve has already delivered a
substantial series of interest rate cuts. The reduction in interest
rates has supported asset prices and reduced interest rates of
all maturities. But, so far, this has catalyzed more refinancing by
corporations and households (which reduces debt service costs
and leaves more money to be spent on more productive things)
than it has boosted new borrowing and demand.
We do not expect the private sector or households to aggressively
take on new debt at this point in the expansion. Further, the United
States is running up against structural barriers to higher growth
rates: There are simply not many more workers left to add, and
we are skeptical of an acceleration in productivity growth. This
suggests that easy policy from central banks globally should
continue to be supportive of asset prices, but that the global
economy needs a boost from somewhere else to reaccelerate.
10 |
What about cash?Investors should be critical of non-strategic holdings of cash. At
this point, cash in most developed markets is struggling to break
even with inflation, and it has not offered the protection that core
fixed income does. It seems like global central banks are keen to
keep interest rates on hold for some time, but the next move is
much more likely to be a cut than a hike. This suggests that cash
should underperform almost every major asset (not to mention
inflation) again in 2020.
This coordinated stance by global central banks also suggests
subdued volatility in currency markets. We expect the dollar to
remain range-bound against major trading pairs like the euro,
yen and emerging market currencies broadly.
What are we expecting from fixed income markets? In 2019, interest rates around the world declined as investor
expectations for growth and inflation fell, safe haven demand
grew, and central banks eased. It was a rare year where both
stocks and bonds saw strong returns. But the cost to falling yields
is significant, especially for those seeking income. Today, some
20% of global investment-grade debt offers a negative yield.
Going forward, we don’t expect interest rates to rise materially.
First, we believe central banks have a clear bias to keep policy
rates low (or lower rates further) to guard against a more severe
slowdown in growth. Second, there is little chance that inflation
accelerates meaningfully next year. And finally, we believe
investors will still maintain a bias toward “safer” assets.
The low rate environment is one of the most significant challenges
facing investors. It will require a disciplined, active approach,
and realistic return expectations. While the yield may not be
compelling, fixed income still has an important place in multi-asset
portfolios as a buffer against equity volatility. Even in a world of
ultra-low yields, core fixed income remains a critical component
of portfolios for this reason. However, income-oriented investors
should consider alternative sources for cash flow, which could
include real estate, preferred equity shares, dividend-paying stocks
and structured notes.
Jan. ’10 Jan. ’11 Jan. ’12 Jan. ’13 Jan. ’14 Jan. ’15 Jan. ’16 Jan. ’17 Jan. ’18 Jan. ’19
35%
30
25
20
15
10
5
0
OVER 20% OF ALL INVESTMENT-GRADE DEBT HAS A NEGATIVE YIELD% of Bloomberg Barclays Global Aggregate Index with negative yield
Source: Bloomberg Financial L.P., Barclays. November 29, 2019.
> This suggests that cash should underperform almost every major asset (not to mention inflation) again in 2020.
PREPARED FOR CHALLENGES, FOCUSED ON OPPORTUNITY | 11
9%876543210
-1 U.S. U.K. France Japan Germany China
10-year government bond yield
Longer-term nominal growth expectations
Cyclicals vs. defensives (Jan. 2014 = 100) 10-year U.S. Treasury yield105 3.8%
100 3.3
95 2.8
90
1.8
2.3
85
1.380Jan. ’14 Jan. ’15 Jan. ’16 Jan. ’17 Jan. ’18 Jan. ’19
Cyclicals vs. defensives 10-year yields
Stimulus!
So what will it take to break us out of the low yield environment? There are a few things—but most come with a cost, or are
downright unlikely. The most powerful catalyst to break the
current malaise could be fiscal stimulus. Low bond yields may
be a problem for income investors, but they represent low
borrowing costs for governments. Because many large economies
don’t seem to be at risk of a debt crunch anytime soon, there is
a compelling argument to be made for increased government
borrowing and spending on programs like infrastructure or
research and development.
In fact, you need to look no further than the experience from
mid-2016 until early 2018 to see what kind of market reaction
could ensue. A large housing infrastructure build in China and
exuberance over the reflationary policies of President Trump
jolted bond yields higher and allowed cyclical equities to
outperform, while temporarily causing a pop in growth. That
sizzle has since fizzled, but the market reaction to new fiscal
stimulus could be powerful.
However, we aren’t holding our breath. We have to get through
the 2020 presidential election in the United States, China would
rather stabilize its economy-wide debt levels than pump new
credit into the economy, and Eurozone countries like Germany
would have to clear considerable political hurdles before fiscal
stimulus gains serious traction. It seems unlikely that there is
the political wherewithal in the developed world to enact large
spending programs.
Source: Bloomberg Financial L.P., IMF, J.P. Morgan Private Bank. November 29, 2019.
CAPACITY IS NOT THE CONSTRAINT: GROWTH RATES ARE WELL CLEAR OF BORROWING COSTS IN THE WORLD’S LARGEST ECONOMIES
Source: Bloomberg Financial L.P., Goldman Sachs. November 29, 2019.
10-YEAR TREASURY YIELDS AND CYCLICAL VS. DEFENSIVE EQUITIES
Another candidate to break the malaise is a return of inflation.
Without the threat of accelerating inflation, central banks have
the luxury to support growth through lower interest rates. In fact,
markets are implying that inflation will average below 2% in the
United States, less than 1% in Germany, and close to 0% in Japan
over the next 10 years. If inflation does accelerate, it would also
likely drive yields higher and would eventually put central banks
in a difficult position. The good news for investors is that we do
not expect inflation to accelerate meaningfully next year, and we
expect that the major central banks will be on hold with a bias
toward easing policy.
12 |
2.5%
2.0
1.5
1.0
0.5
0.02014 2015 2016 2017 2018 2019
United States Germany Japan
In the end, it seems most likely that it will just take time. Industrial
and household consumers will eventually work through the bevy of
inventories that have built up and re-energize the manufacturing
cycle. Once that happens, production will have to pick up to fill
that demand, yields could rise modestly, and cyclical equities (like
industrials and materials) could outperform. Indeed, there are
some early signs that the manufacturing cycle is bottoming, but
we think it is too early to forecast a sustainable reacceleration.
Until we see credible efforts for fiscal stimulus outside the United
States, we are wary of a quick rebound for growth rates, bond
yields or non-U.S. dollar currencies.
Source: Bloomberg Financial L.P. November 29, 2019.
INFLATION EXPECTATIONS IN THE UNITED STATES, EUROPE AND JAPAN ARE LOWMarket-implied 10-year average inflation
> Until we see credible efforts for fiscal stimulus outside the United States, we are wary of a quick rebound for growth rates, bond yields or non-U.S. dollar currencies.
PREPARED FOR CHALLENGES, FOCUSED ON OPPORTUNITY | 13
14 |
PREPARED FOR CHALLENGES, FOCUSED ON OPPORTUNITY | 15
Goodbye to the boom times for Europe
After growth accelerated to above 2.5% in 2017–18, Europe’s
economy has been decelerating for the better part of the
past year and a half. Fortunately, timely economic indicators
suggest Europe is beginning to stabilize around its longer-term
trend growth of around 1%. While stabilization is welcome,
reacceleration looks unlikely, as the slowdown in global activity
has started to impact Europe’s labor market and services sector—
both of which seem set to weaken modestly in early 2020.
The return to lower-trend growth implies two important features.
First, policy accidents can happen with both growth and interest
rates already low, meaning it wouldn’t take a huge mistake to
dramatically worsen economic conditions. Second, growth will
likely be highly subject to global forces (in particular, growth
impulses from the United States and China).
Similar to our global outlook, we see two catalysts that could
change this narrative. First, greater fiscal stimulus from northern
countries such as Germany would help southern countries such
as Italy regain competitiveness and improve overall domestic
demand in Europe. Second, a releveraging by the private non-
financial corporate sector (in other words, corporations other
than financial services) could help jumpstart economic growth
across the region. There’s arguably a strong case for this, given
the ECB’s very accommodative policy backdrop. While both
catalysts seem closer today than in recent years, it would be very
optimistic to predict that they will arrive and alter the script in
Europe in 2020.
On the flipside, lingering populism could flare up and once again
sour sentiment. Next year will see further movement both on
the fate of Brexit and in Italian politics, but neither is likely to
feel fully resolved (at least from the market’s point of view).
Furthermore, despite improvement, banks in Europe remain on a
shakier foundation than those in the United States.
The outlook for Europe at the current juncture is stable
but uninspiring, with politics and policy still top of mind for
investors. The ECB will likely ease policy further in 2020, but we
doubt it will fundamentally change the game. In our view, the
ECB is running up against the limits of monetary policy, thus
strengthening the case for more active fiscal policy.
Europe Spotlight
The outlook for Europe at the current juncture is stable but uninspiring.
16 |
The wild cards and rubber bands
How much should investors care about the U.S. elections? The pain associated with the snap of a rubber band depends
on how far back you pull one side of the band. The bigger the
pullback, the bigger the sting. This is an apt description of what
investors might face in 2020.
The 2020 presidential election is still months away, but it is already
starting to dominate investor conversations. Investors aren’t
nervous about the literal election, they are worried about how
the policies of the winning candidate could impact economics,
markets and taxation. In the case of more progressive Democratic
candidates (like Senators Warren and Sanders), the links are easier
to find. Proposals to reverse the corporate tax cuts of 2017, to curb
or eliminate share buybacks, to tax profits over $100 million, to
break up big tech and banks, and to create financial transactions
taxes would all be probable negatives to markets. Such policies
would represent a significant shift from the “business-friendly”
provisions of the current Administration (a larger rubber band
snap). Worth noting, both wings seem to have similar visions of
an “America first” industrial policy.
TrumpObama
GW Bush
Clinton
Reagan/Bush Carter
Nixon/Ford JFK/LBJ
Eisenhower
FDR/Truman
Coolidge/Hoover
Warren Biden KlobucharSanderspre-2010
Sanderssince 2018
1916
1924
1932
1940
1948
1956
1964
1972
1980
1988
1996
2004
2012
2020
-0.9 -0.7 -0.5 -0.3 -0.1 0.1 0.3 0.5 0.7
Most liberal Most conservative
0.9
SECTION 3
Source: Eye on the Market, J.P. Morgan Asset Management. See December 10, 2018 Eye on the Market publication for methodology and full source details.
POLITICAL IDEOLOGY OF PRESIDENTIAL ADMINISTRATIONS, AND A LOOK AT 2020UCLA Voteview Liberal Conservative scores, derived from Congressional voting histories
PREPARED FOR CHALLENGES, FOCUSED ON OPPORTUNITY | 17
Michael Cembalest, our Chairman of Market and Investment
Strategy, has given us an easy way to visualize the degree to which
a progressive presidency would mark a departure from the current
regime. The chart on page 16 plots the relative political position
of former presidents and candidates based on empirically derived
Congressional voting patterns of themselves and those directly
involved in or aligned with their administrations. As you can see,
Elizabeth Warren or Bernie Sanders would be the most progressive
president in the last 100 years. Regardless of personal political
views, investors need to be realistic: A change of this magnitude
would likely result in some volatility.
Markets will likely fixate on the campaign season, and will work
to price in the probabilities that campaign rhetoric becomes
actual policy. For example, if the market perceives the odds of a
candidate like Senator Warren as rising, then financials, healthcare
and energy companies will likely underperform. In fact, companies
that are sensitive to progressive policies were under pressure
as Senator Warren’s implied odds were on the rise, but have
recovered as her implied odds have fallen back toward 20%.
A comparatively more centrist candidate like Vice President Biden
or a “status quo” result, like the re-election of President Trump,
would likely lead to less volatility. At this point, we think that the
Democratic candidacy is very much up for grabs and do not think
that one party has a clear advantage in the general election. Given
this view, it is too early to change portfolios in direct response to
election outcomes, but the defensive measures taken over the
last ~18 months account in part for the risks.
0
10
20
30
40
50
60%
90
92
94
96
98
100
102%
Apr. ’19 May ’19 Jun. ’19 Jul. ’19 Aug. ’19 Oct. ’19
Progressive sensitive basket relative to Russell 1000 Implied odds of Dem. nom
Nov. ’19Sep. ’19
Senator Warren’s implied odds ofwinning Democratic nomination
Companies exposed to progressiveplatform relative performance
Source: Bloomberg Financial L.P., J.P. Morgan Private Bank, PredictIt.org. November 29, 2019.
AS SEN. WARREN’S ODDS HAVE FALLEN, EXPOSED COMPANIES RECOVERED
> Given this view, it is too early to change portfolios in direct response to election outcomes, but the defensive measures taken over the last ~18 months account in part for the risks.
18 |
What is next for the U.S.-China trade relationship?Between January 2018 and today, markets have been whipsawed
multiple times by the perceived likelihood of a trade deal between
the United States and China. Throughout that time, tariffs on
imports to the United States have gone higher, manufacturing
activity has slowed, corporate confidence has declined, interest
rates have fallen and equity markets have trended sideways
(with one big correction and recovery in the middle). While the
recent “Phase 1” agreement is a step in the right direction, we
have to consider that nothing in the recent news flow or from our
contacts in Washington, DC, or in China gives us any confidence
that the deep-seated issues (mainly China’s industrial priorities and
methods used to achieve those priorities) are close to resolution.
The recent thawing period is driven, in our view, by China’s need
for soybeans. And it offers the President a convenient off-ramp to
book what he can relay to the public as a “win,” and give markets
and the economy a break from the uncertainty. Again, the “Phase 1”
agreement is a step in the right direction, but we still don’t think a
comprehensive deal that fully removes tariffs and tariff uncertainty
will happen before the 2020 U.S. presidential election.
While it seems like President Trump may be hesitant to
escalate the trade war during the campaign season, it seems
to us like a sustainable period of “de-coupling” is underway.
In the near term, avoiding escalation will be critical for global
equities to remain near all-time highs, but in the long term, we
are keenly watching for risks and opportunities that will arise as
the relationship between the world’s two largest economies shifts.
The two charts below are just two examples of “winners” and
“losers” in this process.
40%
30
20
10
0
-10
-202004 2006 2008 2010 2012 2014 2016 2018
0
100
200
300
400
500
600
700
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
800
Source: General Statistics Office of Vietnam. November 29, 2019.
TRADE WAR WINNER: VIETNAMChinese FDI into Vietnam, # of companies, 12-month total
Source: IMF, Haver Analytics. August 30, 2019.
TRADE WAR LOSER: GLOBAL TRADEGlobal export growth, YoY % change
PREPARED FOR CHALLENGES, FOCUSED ON OPPORTUNITY | 19
What should investors do?In anticipation of decelerating growth over the past 18 months, we
prepared portfolios by making them more defensive. We increased
exposure to core bonds, concentrated equity exposure in the
United States and reduced exposure to high yield debt. Over this
time period, stocks and bonds both provided solid returns as lower
interest rates boosted valuations.
The most likely outcome for the next year is that manufacturing
growth stabilizes, consumption and the services sector continue
to chug along, yields remain low and broad equity markets
(hindered by political noise) grind higher despite more swings.
We are comfortable with our positioning, given this environment.
A modest overweight to equities (especially in the United States)
is balanced with a healthy allocation to core fixed income (like
government debt). With inflation benign and interest rates low,
we think investors can expect middle to high single-digit returns
from multi-asset portfolios.
For investors looking for new growth opportunities, there are
many. We believe investors should not wait to invest in the trends
that could shape the next decade. Just over a decade ago (around
the time of the financial crisis), BlackBerrys were more common
than iPhones, no one had hailed a cab using an app or booked a
stay at someone’s house online.
Looking ahead, we are excited by the global digital evolution,
artificial intelligence, new advancements in machine-learning
software and the ability to leverage large amounts of data to break
new ground in businesses of all kinds. Advances in healthcare such
as genetic sequencing, next-generation vehicles, the rollout of
5G networks and the growing importance of cybersecurity are
examples of the trends we are following—in spite of where we
might be in the cycle. Likewise, we are focused on companies that
are committed to research and development as they innovate for
the future, regardless of sector.
For those seeking yield, high-dividend and dividend-growth
stocks are trading at some of their largest valuation discounts
in 20 years. Further, preferred shares could offer a compelling
source of income, especially for U.S. investors. Real estate and
infrastructure could also provide a diversified source.
Finally, the most important thing investors can do is review their
plans. Make sure the risks taken in portfolios are aligned with
the proper time horizons and investment objectives. That is what
should ultimately drive long-term asset allocation. The outlook
for economics, politics and geopolitics might seem murky, and
investors can be tempted to wait for clarity to invest. But time
is one of the most important allies that investors have, and
exchanging time for clarity has rarely been a winning proposition.
This is why we suggest that investors stay prepared, stay focused
and stay invested.
> With inflation benign and interest rates low, we think investors can expect middle to high single-digit returns from multi-asset portfolios.
20 |
PREPARED FOR CHALLENGES, FOCUSED ON OPPORTUNITY | 21
Will Latin America finally reach its full potential in 2020?
Fallout from the U.S.-China trade war, the global slowdown,
domestic social unrest and policy uncertainty weighed heavily
on Latin American economic performance in 2019, with growth
halving from 2018 levels. While regional growth appears to be
bottoming, and a rebound, albeit timid, is projected for 2020,
another wave of developed market weakness and heightened
political noise is clouding the near-term outlook.
Of the three regional heavyweights, only Brazil is poised to match
its growth potential in 2020, with Mexico and Argentina continuing
to underperform noticeably as reform and policy ambiguity drag
down growth. Meanwhile, the region’s monetary policy stance is
relatively tight. This means that central banks still have scope to
lower interest rates further amid declining inflation. This should
help growth at the margin.
In Brazil, the recent approval of an elusive pension reform should
pave the way for some fiscal consolidation, which, along with
privatizations and deleveraging, should allow growth to double in
2020, but from a relatively low base. In Mexico, economic growth is
set to remain below potential in the foreseeable future, and policy
uncertainty is likely to keep investors, domestic and foreign alike,
fairly cautious.
In Argentina, the economy has stumbled into a deep recession, and
a credible recovery will ultimately depend on the policy response
of the new populist government. In Chile, traditionally a poster
child for economic might, protracted social unrest has put policy
continuity at risk and constrained capital investment, raising
concern about the end of an era of fiscal discipline and sound
economic management. In Peru, the worst-case scenarios that
could have resulted from a constitutional crisis seem to have been
averted, and stronger growth may be forthcoming in 2020 after
a material deceleration in 2019. Finally, in Colombia, growth has
remained firm, but a slightly slower 2020 versus a relatively strong
2019 is likely. All in all, subpar growth is set to continue in Latin
America in 2020, putting off reaching the region’s full potential for
at least one more year.
Latin America Spotlight
All in all, subpar growth is set to continue in Latin America in 2020, putting off reaching the region’s full potential for at least one more year.
Author note
The J.P. Morgan Private Bank Outlook 2020 was written by the Wealth Management Global Markets Council, a team of senior economists,
portfolio managers and strategists from across the Private Bank.
PREPARED FOR CHALLENGES, FOCUSED ON OPPORTUNITY | 23
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