The global crisis has changed the priorities of policymakers, consolidated the balance sheets of households and businesses, and embedded innovation. It should be a good idea to see stronger economic growth in the 2020s than we saw in the 10s.
Now that the emergency is over, there are new targets for financial support U.S. Biden's physical and human infrastructure bill plans to allocate trillions of dollars in infrastructure spending, high-speed Internet systems and clean energy, and provide funding for other priorities such as child care and health care. Latin American governments are often in austerity mode after nearly running out of fiscal space to deal with the crisis. Monetary policy is also tightening amid rising inflationary pressures.
The EMEA EU Recovery Act and Green Act focus on research and innovation, digitalization, modernization and recovery, and setting proactive standards to address and respond to climate issues. Financial support varies across Asia. Many developing economies have fiscal space, while advanced economies have implemented significant fiscal easing. As the region's largest growth driver, XX appears to be tightening policies to rebalance the economy and real estate.
With fiscal stimulus likely to have passed its peak, long-term spending proposals for infrastructure and other projects are now in focus.
Data is as of October 1, 2021. Zone based on JPMC location.
In many ways, COVID-19 is more like a war or natural disaster than an economic recession, and policymakers have responded forcefully. Globally, post-pandemic spending commitments total nearly $20 trillion, the highest level of fiscal spending relative to GDP since World War II.
United States
In the United States, Congress and the White House have spent more than $4 trillion to respond to the epidemic, and now politicians are discussing spending another $2 trillion over the next 10 years Dollar. President Joe Biden's ambitious agenda, if partially implemented, would have important economic consequences. As this article is written, Biden’s “Build Back Better” agenda will stimulate spending on physical infrastructure, technology research and development (such as robotics, artificial intelligence, and biotechnology), subsidize domestic semiconductor manufacturing, and support the development of clean technologies. Other measures targeting education, childcare and supply chains could bring some positive long-term economic benefits.
Higher taxes will pay for part of the cost of these policies. Personal tax rates are likely to rise for higher-income households, making asset structure and planning even more critical. While statutory corporate tax rates are likely to remain unchanged, changes in global intangible income taxes and corporate minimum tax rates could weigh on earnings. However, corporate tax changes may not be sufficient to offset the earnings growth we expect from sales and operating leverage. Nor do we expect higher taxes to reduce business investment.
To deal with the pandemic over the next 10 years, Congress will spend another $4 $2 trillion as White House debates spending Europe remains a formidable force — and we Belief that fiscal stimulus will work is in stark contrast to the early 1910s, when fiscal austerity hurt an already weak economy.
After the global financial crisis, real output never returned to potential levels (theoretical long-term gross domestic product). Now, the EU has agreed to spend more than 2 trillion euros on post-pandemic reconstruction until 2027. EU focus areas include digital innovation, research, climate-focused spending and pandemic preparedness plans. Offsetting costs: Proposed financial transaction tax, digital levy and corporate “financial contributions” Nonetheless, we believe the spending will have a net positive impact on the economy and markets.
Europe's strict fiscal rules have been suspended for two years and permanent changes appear likely. There seems to be little economic reason to balance the budget when borrowing costs are negative. However, continued support from the European Central Bank appears crucial to helping peripheral countries maintain manageable borrowing costs. While structural issues related to monetary union remain, the pandemic has led to greater integration across the continent and a more market-oriented fiscal policy stance. ? The eurozone’s fiscal deficit as a percentage of GDP, a measure of fiscal support for the economy, remains larger than at the height of the global financial crisis, although growth is rebounding much faster this time around. Although the fiscal deficit will be reduced, this indicates that the fiscal situation is more favorable than before.
Shifts from these two central banks should support markets in 2022 and beyond.
Elsewhere, central banks are heading in a different direction. Developed market central banks in Norway, New Zealand, Canada and the United Kingdom have all taken steps to tighten monetary policy. While different policy paths could lead to tactical opportunities across regions and currency markets, the Fed and ECB (along with the People's Bank of China) are likely to be the most important for global risk assets.
In emerging markets, the policy stance is decidedly less supportive of investors.
XX policymakers have been working hard to rebalance growth momentum and adjust the economic structure. Their efforts include retightening the housing industry, rapid changes to internet regulations, ambitious climate change goals, and new social movements about inequality and family values. Policymakers pursuing long-term reforms and priorities have been willing to sacrifice short-term growth. In the medium term, investors may have to accept the impact of XX's structural growth slowdown. This state may be more sustainable, but this transition carries short-term risks.
In Latin America, a potential shift toward populism could have serious negative economic consequences for the region.
Recent election results have been mixed so far, as social dissatisfaction with the government's handling of the pandemic and ensuing economic crisis grows. Some countries, such as Chile, voted against the populist alternative, while others, such as Peru, voted in favor.
Left-wing candidates are leading in preliminary polls ahead of crucial presidential elections scheduled for 2022 in regional powers such as Brazil and Colombia. There are growing concerns that election uncertainty could have a negative impact on consumption and investment.
Healthy businesses and consumers: Household net worth is at an all-time high, debt repayment capacity is at an all-time low, and consumer confidence has room to recover. Across the developed world, household savings are rising. American consumers saved nearly $2. 5 trillion above pre-pandemic trends. This contrasts with the experience after the global financial crisis, when falling house prices and falling share prices hurt household wealth.
Healthy Businesses The top quartile of earners, the top 20% of earners, have seen the best growth in net worth at an astonishing rate. From December 2019 to mid-2021, $17 trillion. Still the middle class is much better off in terms of wealth and income.
Net wealth among the 20th-80th percentile income increased by more than $6 trillion, and the debt-to-asset ratio is at its lowest level since the early 1990s.
Healthy businesses and consumer jobs are plentiful, and employers are paying a premium to attract workers.
The exit rate in the United States is at its highest level since 2000, indicating strong demand for labor. (People often quit when they are confident they can find another job.) Overall, wages are up 4-5% year over year, the strongest pace since the mid-2000s and the proportion of small businesses on record planning to increase pay The highest ever. Importantly, wages are growing fastest at the lowest income levels.
This seems to be a global trend. In the UK, for example, the ratio of vacancies per filled position is currently also at its highest level on record. All in all, workers have had the greatest labor pricing power since the 1990s. While there is reason to believe that the current pace of wage growth will slow somewhat, it is likely to be running at a healthier pace than in the post-global financial crisis period.
Wages rising 4–5%, strongest pace since mid-2000s? Healthy businesses and consumers Given this starting point, we expect developed country consumers to drive demand and growth next year and beyond economic growth.
Sectors that lagged in the recovery from the financial crisis, such as housing and autos, may be leading the way in the current cycle. Today’s U.S. housing stock cannot meet demand. Home prices have risen, but low mortgage rates and rising incomes have kept housing affordable. ?The shift to more flexible work schemes should allow people to move from cities and nearby suburbs to relatively cheaper suburbs and outer suburbs. At the same time, innovations in the automotive industry, including electrification and assisted driving, may lead to longer upgrade cycles in the United States and globally.
According to the National Association of Realtors’ Housing Affordability Index, which adjusts for median income and outstanding mortgage interest rates, owner-occupied homes are more affordable than at any time between 2000 and 2010 high.
Healthy Businesses and Consumers On the business side, the starting point is equally impressive.
Earnings and margins are at historic highs, investment-grade credit spreads are at historic lows, and demand is strong. In developed countries, the financial sector appears to be sound and willing to lend. S&P 500 companies predict global economic growth of 6%, sales growth of 15%, and profit growth in 2021. This operating leverage surprised investors and caused the index price to rise by about 25%.
Earnings results were even more significant in Europe (albeit from a lower base). Sales growth of 10% led to a 64% earnings rise in the region, with European stocks tracking U.S. equities in local currency terms for the first time since 2018. While we expect some deceleration in 2022, there's still room for an earnings surprise.
Continuous innovation The global economy becomes more digital. Medical innovation is delivering powerful vaccines at breakneck speed. Policymakers and businesses remain committed to investing in climate change mitigation.
We believe these trends will continue to drive R&D, investment and value creation.
In recent years, there have been innovations in e-commerce, technology hardware, and cloud computing. E-commerce spending is 20% higher than before the pandemic, and global security spending on cloud computing increased 40% during 2021. Everyone benefits from the fact that people are spending more time online. ? In the coming years, we expect the digital transformation of the economy to continue apace: the production of goods and services are likely to become more automated, possibly due to shortages in the labor market. Artificial intelligence and machine learning will continue to power new technologies such as voice assistants and autonomous driving.
Another example: The real cause of the semiconductor shortage is a surge in consumer demand for the goods. Almost everything has semiconductors in it these days! In many ways, the electrification of the global fleet will be a powerful force in the automotive industry.
One data point tells us: the semiconductor content of electric vehicles is at least 4 times that of traditional internal combustion engine vehicles.
Beyond automotive, digital transformation is increasingly prevalent in areas such as finance (payments and blockchain), retail (augmented reality), entertainment (preference algorithms), and healthcare (AI-driven predictive medicine). The metaverse can digitize most of life, for better or for worse.
Cloud computing continues to accelerate. Before the pandemic, 20%-30% of work was done in the cloud. Executives believe it will take 10 years to grow to 80%. Now, only three are needed. For some investors, cryptoassets could be an interesting long-term opportunity within a larger goal-based portfolio.
Medical Innovation In the medical field, researchers are looking to see whether the mRNA technology behind powerful vaccines can be used to treat other diseases.
As medical innovation accelerates, we believe the industry is likely to become more personalized, with an increased focus on preventive care and digitalisation. Wearables, telemedicine and gene editing are other noteworthy areas of investment opportunity.
Continuous policy support from the United States, Europe and China, as well as more frequent and devastating natural disasters, are drawing attention to the need for sustainable investment.
Some estimates suggest that decarbonizing the global economy will require $4-6 trillion per year this decade. To meet President Joe Biden's goal of decarbonizing the grid by 2035, the United States will need to invest $90 billion annually in new wind and solar generation capacity. Despite the comprehensive assessment, we see opportunities in clean technologies such as carbon capture, battery storage, renewable energy and energy efficiency. Circular economy and agricultural technology are also focus areas. The carbon offset market may also provide opportunities for tactical investors.
Key Issues Monitor cross currents.
While we see clear potential for a more dynamic economic cycle, the environment is also rife with cross-currents.
We are confident that the economic expansion will continue into 2022, but its strength may depend on the future monetary response to inflation, and XX's relative success in rebalancing its economy and the transition from the epidemic to Efforts to speed up endemic transition.
Inflation and Monetary Policy The market now indicates that there will be a lift-off in the middle of next year, with short-term interest rates approaching 1% by the end of the year.
Preventing inflation is key to achieving long-term goals. Going into 2022, you can build a portfolio that acknowledges and mitigates inflation risks.
On the issue of interest rate hikes, we expect to be slightly more patient. The benign inflation backdrop (our base case view) should give the Fed some leeway to wait for a more complete recovery of the labor market toward pre-pandemic trends.
In 2021, high core inflation in the United States (excluding food and energy) was driven by a surge in demand for goods. Supply chains are under pressure. In recent years, they have adapted to a prolonged period of tepid economic activity, sluggish demand and uncertainty over U.S.-China trade tensions.
Today, however, actual spending on goods is 15% higher than in the previous period. The coronavirus disease 2019 disruption, especially given the disruption of strict COVID-19 containment policies, has seen a surge in imports from China and other parts of Asia, but supply has not matched demand. This has also led to a shortage of semiconductors, exacerbating price spikes in the automotive industry. In fact, in 2021, 30% of U.S. consumer price increases were driven by automobiles, even though this sector accounted for only 7% of consumers' basket.
Inflation and Monetary Policy We expect increases in commodity prices to be temporary. As the pandemic subsides, consumers should shift spending from goods to services. Supply chain pressures should be easing, and while foreign direct investment has collapsed, trade and portfolio flows suggest that the secular forces of globalization that have kept commodity inflation in check for two decades are unlikely to be fully reversed.
However, there are signs that price increases are broadening. For example, the important and troublesome component of housing inflation is rising. Additionally, wage growth is already strong and should be underpinned by continued progress in the labor market toward maximum employment.
Inflation and Monetary Policy But the labor market has been a puzzle for economists and strategists for a year.
The U.S. economy still lacks 5.5 million workers, and the unemployment rate exceeds 4.5%. These data indicate that labor supply is sufficient. However, survey data and other indicators show that businesses are having a hard time recruiting workers, suggesting that the labor market is quickly losing steam.
While inflationary pressures are spreading across the global economy, employment dynamics are not unique to the United States. Job vacancies are increasing in many developed markets, particularly in the high-touch leisure and hospitality industries. In the UK, for example, the leisure and hospitality industry is more than twice as likely to face a labor shortage than other industries. In developing countries such as Vietnam, the COVID-19 outbreak has led to labor shortages in large cities. The global pandemic is affecting labor dynamics in global markets.
Despite demographic pressures (approximately 1.5 million U.S. workers took early retirement during the pandemic), we expect the U.S. labor supply to increase as health risks reduce. In addition, some 2.7 million workers receiving additional unemployment benefits are better off than those who are employed and may also be looking for work in the coming months. Strong wage growth should lure some of the roughly 2 million working-age people who have dropped out of the labor force back into the workforce. Overall, we believe that “labor shortages” are more appropriately described as a misalignment between available jobs, the wages they pay, and the willingness and ability of part-time workers to take those jobs. Over time, this dynamic should return to equilibrium.
Inflation and Monetary Policy In the euro area, while unemployment remains high, the heavy use of short-term work means that the overall decline in the labor force is not as severe as in the United States. As a result, wage growth is sluggish, a dynamic that should help keep the ECB patient. Over the medium term, we expect European wage growth to proceed at a healthy pace as the labor market recovery continues.
Wages have risen faster than prices for goods and services during the pandemic, and we find little evidence that rising costs have led to lower profit margins.
Risks to our outlook are that core commodity inflation remains elevated or that the employment-to-population ratio never fully recovers. This means the economy has indeed emerged from the depression, which could lead to an aggressive response from the Fed in 2022. This could cause severe damage to the economy and risk assets.
Now, growth is slowing significantly.
XX’s year-on-year GDP growth fell below 5% for the first time after policymakers tightened monetary and fiscal policies to curb excesses in the real estate market and crack down on the digital consumer sector. In exchange for slower nominal growth, policymakers expect middle-class consumption and high value-added manufacturing to make the economy more sustainable. The simultaneous pursuit of broad macro and industrial policies increases the difficulty of policy implementation and poses downside risks to growth and markets.
This shift in XX’s economic balancing act has had a serious impact on the economy and market.
Bonds of stressed real estate developers are trading at 20-30 cents, and the market value of Internet companies has been reduced by half. Alibaba’s valuation alone has fallen by more than $400 billion from its peak level. The for-profit education sector has virtually ceased to exist. XX's economic weakness mainly affects the global economy through trade. The XX real estate industry is one of the largest sources of global demand for industrial commodities. Clearly, this slowdown is having an impact on commodity producers around the world.
XX’s economic stimulus measures are very weak, aiming to control excess net new credit, such as 6-month net new credit of % of GDP
At this point, many people Everyone is debating whether XX can be invested.
We think this is the wrong question. Anything can be invested at the right price if the potential reward is deemed worth the risk.
Opportunities can be discovered, but investors need to consider the full range of XX assets and related risks. Also keep in mind that while most central banks are either raising rates or debating when to do so, XX policymakers may be closer to easing. This dynamic could provide interesting diversification benefits for XX bonds, especially given the challenging fixed income outlook in developed countries.
The different characteristics of offshore and onshore indices are crucial. The Offshore Equity Index (MSCIXX) consists primarily of technology and internet companies and is primarily owned by foreign investors. The onshore equity index (CSI300) is more evenly distributed across industries and is primarily held by domestic investors.
At this point, the latter seems more attractive to us.
In the near term, uncertainty over the impact of current and future regulations on margins and earnings growth is likely to weigh on offshore stocks as investors struggle to value these companies. However, the onshore market includes many clean energy, electric vehicle (EV) and semiconductor companies that could benefit from government policy support.
While the path of the coronavirus has proven difficult to predict, investors are now taking uncertainty in stride.
The bad news is that COVID-19 appears likely to become an endemic disease; humans will have to continue to adapt to it. The good news is that vaccinations, immunity gained from previous infections, and new treatments all reduce the risks associated with the spread of the disease.
At present, the COVID-19 vaccination plan has been completed, and 42% of developed countries have begun distributing vaccines. Most estimates suggest that more than 65% of the world has some form of protection against the virus, whether through vaccination or prior exposure.
However, more COVID-19 outbreaks may be due to new mutations. To get a sense of how the market might react, let's look at the U.S. experience with the Delta wave: Cases of unexpected gains hit stocks of companies tied to liquidity (such as airlines) and oil prices. Logic: The wider the spread of CVID-19, the less likely travel is, so oil demand falls.
From pandemic to endemic A further complicating consideration for investors is the extent to which certain countries pursue “zero-COVID” policies.
The longer they do this, the greater the potential disruption to manufacturing output and global supply chains. In the third quarter, companies including Nike and Toyota reported supply issues due to lockdowns in places like Vietnam.
At one point, as many as 50% of the country's clothing and footwear manufacturers went out of business. XX's port closures further disrupted global shipping.
More broadly, economic growth forecasts for the third quarter of annualized U.S. GDP plummeted from 6% to 2% for the full quarter as global supply chain disruptions were exacerbated by rising virus cases. %. Business conditions in East Asia (particularly China, Australia and Vietnam) have deteriorated further.
Bond yields fell from pandemic to endemic until the delta wave clearly exceeded the peak in the United States. In the stock market, the numbers-driven, large-cap sector of the market has outperformed those sectors more closely tied to economic output.
But in the end, the delta wave actually had little impact on either U.S. or European stock markets: the S&P 500 hit 28 new highs, with the European Stoxx 600 not far behind. Recently, increased vaccine penetration has led to significant improvements in production operations in places such as Hanoi, and there are early signs that global supply chain problems are beginning to ease.
28 S&P 500 hits new highs during delta swing ? At the heart of our outlook is that the global economy will be more dynamic in this economic cycle than the last.
Hold cash for short-term expenses and as a psychological safety net against volatility. But strategic cash as a strategic investment is our least favorite asset class.
Economic policies in the United States, Europe, and China are designed to promote more sustained, higher-quality growth across the income spectrum, even if the relative chances of success vary across regions. U.S. and European households and businesses have healthy balance sheets and strong demand for their goods, services and labor. Innovation is driving structural changes across industries and may lead to greater productivity in the global economy.
These forces have important investment implications, especially for long-term investors who may still be in the midst of the economic malaise of the late 2010s.
In 2022, as the U.S. and European economies move further into the mid-cycle, we expect a strong growth environment characterized by higher inflation than investors saw in the previous cycle. While the stage of the cycle may vary by region, these conditions bode well for global equities, especially relative to core fixed income. As volatility in equities and fixed income is likely to continue to rise, dynamic active management may add value. Adjusted for inflation, the expected return on cash remains negative; it remains our least favorite asset class.
Stocks No, stocks are not undervalued. They are fully valued at best for most major markets, but investors are paying a premium for superior earnings growth and free cash flow generation.
In most of the regions we cover, we have a more optimistic than consensus view on earnings growth next year, with the exception of XX. We prefer developed markets to emerging markets, but we are more concerned about the quality of underlying business drivers and revenue streams than jurisdiction. Some investors worry that profit margins will worsen. We believe higher prices and higher productivity will offset rising input and labor costs.
In fact, we believe we are indeed in the "growth" phase of the market cycle, where earnings growth drives stock market returns and stock pickers can make profits.
Importantly, we expect returns to be more evenly distributed across sectors and companies, rather than just concentrated on the largest players with the strongest long-term tailwinds. Given the dynamics of the previous cycle, there may have been an accumulation of imbalances in the portfolio. Of continuing importance will be the balance between long-term growth companies trading at "reasonable" prices versus companies benefiting from the short-term strength of the real economy. Therefore, the technology and financial sectors are two of our favorite areas. They are portfolio diversifiers because they react in opposite directions to changes in interest rates, and both sectors should be driven by strong earnings growth. As we move further into the mid-term, active managers should be able to add value to equity portfolios.
Private Investing For many investors, private markets represent an untapped opportunity set.
Private markets can be a particularly attractive hunting ground for investments related to the megatrends we have identified: digital transformation, healthcare innovation and sustainability. For example, of the more than 100,000 global software companies, 97% are private companies.
Small, privately held biotech companies are increasingly becoming an important source of innovation for large pharmaceutical companies. Only 30% of the top marketed drugs from Big Pharma were developed in-house. We expect that private markets will achieve higher returns relative to public markets, in part because of access to these growth drivers.
Ties Core fixed income faces a challenging outlook given that historically low yields are likely to continue rising while inflation remains elevated.
Investors face a dual challenge: finding yield and protecting against potential stock volatility while outpacing inflation.
Core bonds remain a key component of portfolio construction. While low interest rates eliminate some of the capital appreciation that might occur in a recession, the asset class still offers protection against negative growth outcomes. However, this year we have advocated the use of flexible active managers (whether in fixed income or across asset classes) who can dynamically adjust portfolios in response to changing market conditions to help complement core fixed income. This is a strategy for 2021 that should continue to grow in the 2022 portfolio.
To be clear, we are more aggressive on core fixed income this year than we were last year. Despite lower interest rates, they have risen sharply over the past year, inching closer to levels where bonds offer more competitive risk-adjusted returns relative to stocks. For U.S. investors, especially those in high-tax states, municipal bonds may look more attractive now given rising yields.
In the short term, growing expectations for a rate hike by the Federal Reserve are giving investors an opportunity to get out of cash and instead buy short-term bonds.
High-yield bond valuations are unconvincing (yields are relatively low and spreads are tight), but there are good reasons: High-yield yields in 2021 are the lowest on record.
However, we recommend relying on other components of extended credit, such as leveraged loans, hybrid securities and private credit, to grow revenue with new capital. Investors may also consider bank preferred stocks because of the strong capital buffers and favorable tax treatment in the United States.
For investors seeking inflation protection, we do not believe Treasury Inflation-Protected Securities or gold are good options at this time. Instead, we like assets that rely on inflation-linked cash flow, such as equities, direct real estate and infrastructure with pricing power.
By and large, diversified portfolios can still achieve investor goals, but they require thoughtful design and careful management.