Now that the emergency is over, the goal of fiscal support is the new goal U.S. Biden's Physical and Human Infrastructure Act plans to allocate trillions of dollars in infrastructure spending, high-speed Internet systems, and clean energy, as well as funding for other priorities such as child care and health care. Latin America Governments are typically in austerity mode after nearly exhausting their fiscal space in response to a crisis. Monetary policy is also tightening amid rising inflationary pressures.
Europe, Middle East and AfricaThe EU Recovery Act and Green Bill focus on research and innovation, digitalization, modernization and recovery, and set aggressive standards to address and respond to climate issues. AsiaAsia's financial support varies from country to country. Many developing economies have fiscal space, while developed economies have implemented significant fiscal easing. XX, the region's largest growth driver, appears to be tightening policies to rebalance its economy and real estate.
With fiscal stimulus likely to exceed its peak, long-term spending proposals for infrastructure and other projects are now in focus.
Data is as of 10/1/2021. Areas based on JPMC locations.
In many ways, the 2019 coronavirus disease is more like a war or natural disaster than a recession, and policymakers 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 already spent more than $4 trillion to deal with the pandemic, and now politicians are talking about spending another $2 trillion over the next 10 years. President Joe Biden's ambitious agenda, if partially implemented, would have important economic consequences. As this article writes, Biden's "Build Back Better" agenda would stimulate spending on physical infrastructure, technological research and development (e.g., robotics, artificial intelligence, and biotechnology), subsidize the domestic semiconductor manufacturing industry, and support the development of clean technology. Other measures targeting education, childcare, and the supply chain could have some positive long-term economic benefits.
Higher taxes would pay for some of the costs of these policies. Personal tax rates are likely to rise for higher-income households, making asset structuring and planning even more critical. While the statutory corporate tax rate is likely to remain unchanged, changes to the global intangible income tax and the corporate minimum tax could be a drag on revenues. However, changes in corporate taxes may not be sufficient to offset the revenue growth we expect from sales and operating leverage. We also do not expect higher taxes to reduce business investment.
In response to a flu pandemic in the next 10 years, Congress will And the White House debating spending spends another big chunk of money $4 $2 trillion Europe is still a powerful force - and we believe the fiscal stimulus will do the trick In stark contrast to the early 1910s, when austerity hurt an already weak economy.
Real output never recovered to potential (theoretical long-term GDP) after the global financial crisis. Now, the EU has agreed to spend more than €2 trillion by 2027 on post-pandemic reconstruction. Areas of focus for the EU include digital innovation, research, climate-focused spending and pandemic preparedness programs. Offsetting costs: proposed financial transaction taxes, digital levies and corporate "financial contributions" Despite this, we believe the spending will have a net positive impact on the economy and markets.
Europe's strict fiscal rules have been on hold for two years and permanent change seems likely. When borrowing costs are negative, there seems little economic reason to maintain a balanced budget. However, the continued support of the European Central Bank appears to be critical in helping peripheral countries maintain manageable borrowing costs. While structural problems associated with monetary union remain, the pandemic has led to a more integrated continent and a more market-oriented stance on fiscal policy.? Eurozone fiscal deficits as a percentage of GDP (a measure of financial support to the economy) are still larger than at the peak of the global financial crisis, although this time growth has rebounded much faster. Although the fiscal deficit will be lower, this suggests that the fiscal position is more favorable than before.
The shift in these two central banks should support markets in 2022 and beyond.
Elsewhere, central banks are moving in a different direction. Developed market central banks in Norway, New Zealand, Canada and the UK have all taken steps to tighten monetary policy. While different policy paths may lead to tactical opportunities across regions and currency markets, the Fed and ECB (and the PBoX) may matter most for global risk assets.
In emerging markets, the policy stance is clearly less supportive of investors.
Policymakers in XX have been trying to rebalance growth drivers and restructure the economy. Their efforts include a re-tightening of the real estate sector, rapid changes to internet regulation, ambitious climate change targets, and new social campaigns on 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 a XX structural slowdown in growth. This state of affairs is likely to be more sustainable, but such a transition entails short-term risks.
In Latin America, a potential shift to populism could have serious negative economic implications for the region.
So far, recent election results have been mixed, as social dissatisfaction with governments' handling of the flu pandemic and the 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 key presidential elections scheduled for 2022 in regional powers such as Brazil and Colombia. Concerns are growing 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 service is at an all-time low, and consumer confidence has room to recover. Across the developed world, household savings are increasing. U.S. consumers are saving nearly $2. 5 trillion above the pre-pandemic trend. This contrasts with the experience after the global financial crisis, when falling house prices and stock prices hurt household wealth.
Healthy businesses The top quartile of earners The top 20% of income earners are in the best position to grow their net worth at an alarming rate. 17 trillion dollars from December 2019 through mid-2021. Nonetheless the middle class is also much richer in terms of wealth and income.
Net wealth at the 20th-80th percentile of income has increased by more than $6 trillion, and the ratio of liabilities to assets is at its lowest level since the early 1990s.
Healthy businesses and consumer jobs are plentiful, and employers are paying extra to attract workers.
The U.S. exit rate is at its highest level on record since 2000, indicating strong labor demand. (People often quit when they are confident they will find another job.) Overall, wages are up 4-5% year-over-year, the strongest rate of growth since the mid-2000s and the highest percentage of small businesses planning to raise pay on record. Importantly, wages grew fastest at the lowest income levels.
This appears to be a global trend. In the UK, for example, the ratio of job vacancies per filled position is now similarly at its highest level on record. In short, workers have had the most power to price labor since the 1990s. While there is reason to believe that the current rate of wage growth will slow, it is likely to run at a healthier pace than it did in the post-GFC period.
Wages are up 4-5%, the strongest pace since the mid-2000s ? Healthy businesses and consumers Given this starting point, we expect developed country consumers to drive demand and economic growth next year and beyond.
Sectors that lagged in the recovery from the financial crisis, such as housing and autos, are likely to lead the current cycle. Today's U.S. housing stock cannot meet demand. Home prices have risen, but low mortgage rates and income growth have made housing affordable.? The shift to more flexible work programs should allow people to move from cities and nearby suburbs to relatively inexpensive suburbs and far-flung suburbs. Meanwhile, innovations in the auto industry, including electrification and assisted driving, could lead to longer upgrade cycles in the U.S. and globally.
Owner-occupied housing is more affordable than at any time between 2000 and 2010, according to the National Association of Realtors' Housing Affordability Index, which is adjusted for median income and interest rates on outstanding mortgages.
Healthy businesses and consumers are off to an equally impressive start on the business side.
Earnings and margins are at all-time highs, investment grade credit spreads are at all-time lows, and demand is strong. In the developed world, the financial sector appears robust and willing to lend. The S&P 500 companies have the global economy growing at 6%, sales at 15%, and profits at 2021. this operating leverage has surprised investors and has led to about a 25% increase in the price of the index.
Earnings results in Europe were even more dramatic (albeit from a lower base). 10% sales growth led to 64% earnings growth in the region, and for the first time since 2018, European equities kept pace with U.S. equities in local currency terms. While we expect some deceleration in 2022, there is still room for earnings to rise unexpectedly.
Continued innovationThe global economy is becoming more digital. Medical innovation is delivering powerful vaccines at an alarming rate. 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.
Recent years have seen innovation in e-commerce, tech hardware and cloud computing. E-commerce spending is 20% higher than it was before the pandemic, and global spending on cloud security is up 40% between 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 at a rapid pace: automation in the production of goods and services is likely to increase, possibly due to labor market shortages. Artificial intelligence and machine learning will continue to support new technologies such as voice assistants and autonomous driving.
Another example: the real reason for the semiconductor shortage is the surge in consumer demand for the commodity. There are semiconductors in almost everything these days! The digital ones are in the automotive industry, and in many ways the electrification of the global fleet will be a powerful force.
One data point tells us that electric cars have at least four times as many semiconductors as traditional internal combustion engine cars.
Beyond automobiles, digital transformation is becoming more prevalent in finance (payments and blockchain), retail (augmented reality), entertainment (preference algorithms), and healthcare (AI-powered predictive medicine). metaverse can digitize most of life, for better or worse.
Cloud computing continues to accelerate. Before the pandemic, 20-30% of work was done in the cloud. Executives thought it would take 10 years for that percentage to grow to 80%. Now, it only takes three. For some investors, crypto assets could be an interesting long-term opportunity in a larger goal-based portfolio.
Medical innovation In the medical field, researchers are looking to see if the mRNA technology behind powerful vaccines can be used to treat other diseases.
As medical innovation accelerates, we think the sector is likely to become more personalized, preventive care-focused and digital. Wearables, telemedicine and gene editing are other notable areas of investment opportunity.
Continued policy support from the US, Europe and XX, as well as more frequent and destructive natural disasters, are drawing attention to the need for sustainable investments.
Some estimates suggest that decarbonizing the global economy will require $4-6 trillion per year this decade. To meet President Biden's goal of decarbonizing the grid by 2035, the U.S. would need to invest $90 billion per year in new wind and solar capacity. Despite comprehensive assessments, we see opportunities for clean technologies such as carbon capture, battery storage, renewable energy and energy efficiency. Circular economy and agricultural technologies are also areas of focus. The carbon offset market may also provide opportunities for tactical investors.
Key issues Monitoring cross-currents.
While we see the clear potential for a more dynamic economic cycle, the environment is also full of cross-currents.
We are confident that the economic expansion will continue through 2022, but its strength is likely to depend on the future monetary response to inflation, the relative success of XX policymakers in rebalancing their economies, and the speed of the transition from epidemic to endemic.
Inflation and Monetary Policy The market now suggests an uplift 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 recognizes and mitigates inflation risk.
We expect slightly more patience when it comes to rate hikes. The moderate inflation backdrop (our base case view) should give the Fed some leeway to wait for the labor market to recover more completely toward pre-pandemic trends.
2021, high core inflation (excluding food and energy) in the US is driven by a surge in demand for commodities. Supply chains are under pressure. In recent years, they have adapted to a prolonged period of lukewarm economic activity, sluggish demand, and uncertainty over U.S.-China trade tensions.
Today, however, real spending on commodities is 15% higher than in the previous period.2019 The disruption of coronavirus disease, especially given the disruption of the stringent COVID-19 containment policy, has seen imports surge in XX and the rest of Asia, but supply has not matched demand. This has also led to a shortage of semiconductors, exacerbating price spikes in the automotive sector. In fact, in 2021, 30% of the increase in U.S. consumer prices is driven by automobiles, even though this sector accounts for only 7% of the consumer spending basket.
Inflation and Monetary Policy We expect the commodity price increases to be temporary. As the epidemic subsides, consumers should shift spending from goods to services. Supply chain pressures should ease, and although foreign direct investment has collapsed, trade and portfolio flows suggest that the long-term forces of globalization that have been controlling commodity inflation for two decades are unlikely to be fully reversed.
However, there are signs that price inflation is widening. For example, housing inflation, an important but tricky component, is rising. In addition, wage growth has been strong and should be supported by continued progress in the labor market toward maximum employment.
Inflation and Monetary Policy But the labor market has been a puzzle to economists and strategists for a year.
The U.S. economy is still short 5.5 million workers and has an unemployment rate of over 4.5%. These data suggest that there is an ample supply of labor. However, survey data and other indicators suggest that businesses are having a very difficult time hiring employees, suggesting that the labor market is quickly losing steam.
While inflationary pressures are spreading through the global economy, employment dynamics are not unique to the United States. In many developed markets, job openings have increased, particularly in the high-touch leisure and hospitality sector. In the United Kingdom, for example, the leisure and hospitality sector is more than twice as likely to face labor shortages as any other sector. In developing XX countries such as Vietnam 2019 coronavirus disease outbreaks have led to labor shortages in major cities. Global pandemics are impacting labor dynamics in global markets.
Despite demographic pressures (approximately 1.5 million workers in the U.S. took early retirement during the flu pandemic), we expect the U.S. labor supply to increase as health risks decrease. In addition, the roughly 2.7 million workers receiving additional unemployment benefits are wealthier than those who are working, and they are also likely to look for jobs in the coming months. Strong wage growth should lure some of the roughly 2 million working-age people who dropped out of the labor force back in. Overall, we believe that the "labor shortage" is more appropriately described as a mismatch between the jobs available, the wages they pay, and the willingness and ability of part-time workers to take those jobs. Over time, this dynamic should rebalance.
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 has not been as severe as in the United States. As a result, wages are growing slowly, a dynamic that should help keep the ECB patient. Over the medium term, we expect wage growth in Europe to proceed at a healthy pace as the labor market recovery continues.
During the flu pandemic, wage increases have outpaced price increases in goods and services, and we find little evidence that rising costs have led to lower profit margins. The risk to our outlook is that core goods inflation remains high or that the employment-to-population ratio never fully recovers. This implies that the economy has indeed emerged from the recession, which could lead to an aggressive Fed response in 2022. This could cause serious damage to the economy and risk assets.
Now, growth is slowing significantly.
Year-on-year GDP growth in XX fell below 5% for the first time after policymakers tightened monetary and fiscal policy 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 drive a more sustainable economy. Meanwhile the 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 equilibrium approach is already having a serious impact on the economy and markets.
Stressed real estate developer bonds are trading at 20-30 cents on the dollar, and Internet companies have seen their market capitalizations shrink by half. Alibaba's valuation alone is down more than $400 billion from peak levels. The for-profit education sector has virtually ceased to exist.XX Economic weakness is affecting the global economy primarily through trade.XX The real estate sector is one of the largest sources of global demand for industrial goods. Clearly, this slowdown is having an impact on commodity producers around the world.
The stimulus in XX was weak and aimed at controlling excess net new credit such as % of GDP 6 months of net new credit
At this point, many are debating whether XX is investable.
We think this is the wrong question. Anything can be invested at the right price if the potential return is deemed worth the risk.
Opportunities can be identified, but investors need to consider the full range of XX assets and associated risks. Remember, too, that while most central banks are either raising rates or discussing when to do so, XX policymakers may be closer to easing. This dynamic could lead to interesting diversification gains in XX bonds, especially given the challenging fixed income outlook for developed countries.
The different characteristics of offshore and land-based indices are critical. The offshore equity index (MSCIXX) consists mainly of technology and internet companies and is mainly held by foreign investors. The onshore equity index (CSI300) is more evenly distributed across sectors and is primarily held by domestic investors.
At this point, the latter seems more attractive to us.
In the short term, uncertainty about the impact of current and future regulation on margins and earnings growth could put pressure 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.
Although the path of coronavirus transmission has proved difficult to predict, investors can now deal comfortably with uncertainty.
The bad news is that COVID-19 seems 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 have reduced the risks associated with disease transmission.
The 2019 Coronavirus Disease Vaccination Program is now complete, and 42% of developed countries have begun distributing the vaccine. Most estimates suggest that more than 65% of the world has some form of protection against the virus, either through vaccination or prior exposure.
However, more 2019 coronavirus disease outbreaks may be due to new mutations. To get a sense of how markets might react, let's look at the U.S. experience with the Delta wave: cases of unexpected rises that hit stocks of companies tied to liquidity (e.g., airlines) and oil prices. Logic: the wider the spread of CVID-19, the less likely it is to travel, so the demand for oil falls.
From pandemic to endemic, a more complex consideration for investors is the extent to which certain countries have a "zero new coronavirus" policy.
The longer they do this, the greater the potential disruption to manufacturing output and global supply chains. In the third quarter, companies like Nike and Toyota said they had supply problems due to blockades in places like Vietnam. At one point, as many as 50 percent of the country's apparel and footwear makers went out of business. xx The port closures further disrupted global shipping.
More broadly, economic growth forecasts for annualized U.S. GDP plummeted from 6% to 2% throughout the third quarter as disruptions to global supply chains were exacerbated by an increase in viral cases. Business conditions in East Asia (particularly XX, Australia and Vietnam) deteriorated further.
From pandemic to endemic bond yields fell until the Delta wave clearly exceeded the US peak. In equity markets, the large-capitalization areas of the market, which are numbers-oriented, outperformed those sectors that are more closely related to economic output.
But in the end, the Delta Wave actually had little impact on either the US or European stock markets: the S&P 500 hit 28 new highs, followed by the Euro Stoxx 600. More recently, increased vaccine penetration has led to significant improvements in manufacturing operations in places like Hanoi, and there are tentative signs that global supply chain problems are beginning to ease.
28 S&P 500 hits new highs during delta volatility ? At the heart of our outlook is the idea that the global economy will be more vibrant in this economic cycle than in the last.
Cash is held 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 U.S., Europe, and the XX are designed to promote more sustained, higher-quality growth across the income spectrum, even if the relative chances of success vary from region to region. Households and businesses in the U.S. and Europe have healthy balance sheets and strong demand for their goods, services and labor. Innovation is driving structural change across industries and is likely to lead to higher productivity in the global economy.
These forces have important investment implications, especially for long-term investors, who may still be in the same position as they were in the economically depressed late 2010s.
In 2022, as the U.S. and European economies move further into their mid-cycles, 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, particularly relative to core fixed income. With volatility likely to remain elevated in both equities and fixed income, dynamic active management may add value. Inflation-adjusted, the expected return on cash remains negative; it remains our least favorite asset class.
Equities No, equities are not undervalued. They are at best fully valued 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 are more optimistic than the general view on earnings growth next year, with the exception of XX. We favor developed markets over emerging markets, but we are more concerned about the quality of underlying business drivers and revenue streams than jurisdictions. Some investors are concerned about deteriorating margins. We believe rising input and labor costs will be offset by higher prices and productivity gains.
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 earn profits.
Importantly, we expect returns to be spread more evenly across sectors and companies, and not just concentrated on the largest players with the strongest long-term tailwinds. Given the dynamics of the previous cycle, imbalances may have accumulated in portfolios. Of continuing importance will be the balance between long term, long term growth companies trading at "reasonable" prices and those benefiting from the short term strength of the real economy. The technology and financial sectors are therefore 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 medium term, active managers should be able to add value to equity portfolios.
Private Investments For many investors, the private markets represent an untapped opportunity set.
For investments related to the megatrends we have identified (digital transformation, healthcare innovation, and sustainability), the private markets can be a particularly attractive hunting ground. For example, of the more than 100,000 global software companies, 97% are privately held. 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 are developed in-house. We expect higher returns from the private market relative to the public*** market, in part because of access to these growth drivers.
Nexus Core fixed income faces a challenging outlook given that historically low yields are likely to continue to rise and inflation is still rising.
Investors face a dual challenge: finding yield and guarding against potential equity volatility while outperforming inflation.
Core bonds remain a key component of portfolio construction. While low interest rates eliminate some of the capital appreciation that can occur in a recession, the asset class still offers protection against negative growth outcomes. However, so far this year, we have advocated for the use of flexible active managers (both fixed income and cross-asset class) who can dynamically adjust portfolios to changing market conditions to help supplement core fixed income. This is one strategy for 2021, and the portfolio should continue to grow in 2022.
To be clear, we are more active in core fixed income this year than we were last year. Despite being low, interest rates have risen sharply over the past year, edging closer to the level where bonds can offer more competitive risk-adjusted returns relative to equities. For U.S. investors, especially those in high-tax states, municipal bonds may now look more attractive given rising yields.
In the short term, growing expectations of Fed rate hikes are giving investors an opportunity to get out of cash and into short-term bonds.
High-yield bond valuations are not compelling (relatively low yields and small spreads), but for good reason: 2021's high yield is the lowest on record.
However, we recommend relying on other segments of extended credit, such as leveraged loans, hybrid securities and private credit, to increase income with new capital. Investors may also want to consider bank preferred stock, as the U.S. has strong capital buffers and favorable tax treatment.
For investors looking for inflation protection, we don't think Treasury inflation-protected securities or gold are good options right now. Instead, we like to rely on assets with cash flows linked to inflation, such as equities with pricing power, outright real estate and infrastructure.
By and large, diversified portfolios can still achieve an investor's goals, but they need to be thoughtfully designed and carefully managed.