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Jul 10, 2019

JPMorgan downgrades global growth forecasts, but is positive on equities

Mid-year outlook highlights trade talk concerns and preference for US over European equities

Equity markets have had a good first half of the year, boosted by a dovish monetary policy from the world’s central banks, with the S&P 500 hitting another record high, notes JPMorgan’s mid-year market outlook.

Following the June 2019 G20 summit, where a US-China trade truce was agreed for the time being, asset prices should be supported for the remainder of the year, notes the review. Low single-digit returns are expected across most asset classes, as the global economy slips slowly into ‘sub-trend’ growth and valuations are less attractive.

In the report, the JPMorgan research team explores how investors should be positioned for the second half of 2019 as central bank easing becomes more synchronized.

The dovish shift in global monetary policy continues to deepen, with macroeconomic policy support coming from the Federal Reserve’s pivot [holding interest rates] and China’s fiscal easing, observes the outlook.  

Trade barriers and risk

The Trump administration’s willingness to actively use trade barriers as a tool of broader foreign policy remains a key risk to monitor, despite agreement to a second truce between the US and China on trade negotiations, comments the report. And the business sector response to this assault, rather than the direct impact of higher tariffs, poses the greatest threat to global growth. ​

‘We have consequently downgraded global growth forecasts further,’ says JPMorgan chief economist Bruce Kasman in an accompanying commentary. ‘At the center of this storm, we have lowered GDP growth for the US and China by an annualized 0.5 percentage points for the remaining quarters of 2019 and recently reduced second-quarter US GDP growth to 1.25 percent.’

Similar drags on growth are set to follow in other parts of the global economy and the central bank policy reaction is expected to be straightforward. China is committed to maintaining 6 percent growth and will respond to any slowing with further easing.

In the US, the Federal Open Market Committee is ready to respond to slowing GDP and job growth, with JPMorgan’s economic research team now forecasting two rate cuts later this year – one this month and another in September. A large number of central banks will likely follow suit, including the European Central Bank, Bank of Japan and 13 emerging market central banks.

‘These additional policy supports, alongside healthy private sector fundamentals, underlie our view that the latest shocks won’t tip the global economy into recession,’ says Kasman. ‘But even a healthy expansion can be thrown off course if buffeted by a large enough shock. For the US, recession risks for the next 12 months have consequently risen from roughly 25 percent in September 2018 to around 45 percent currently.’

The annual pace of global GDP growth in 2019 is now forecast at 2.7 percent, with the US and eurozone area expected to come in at 2.4 percent and 1.2 percent, respectively, over the same period, according to JPMorgan estimates.

Outlook for equities

In total, JPMorgan now expects six developed market and 13 emerging market central banks to ease in the latter half of the year. Policy rates are estimated to decline by a GDP-weighted average of 29 basis points (bps) for developed market central banks and 31 bps for emerging market central banks.

This central bank dovishness, along with low positioning, should support global equities through the global slowdown, but trade uncertainty remains the single largest source of downside risk.

Existing tariffs are already pressuring profits, but this has been offset partially by the impact of the Tax Act so far. Companies will likely address this tariff impact in the upcoming reporting season with lower growth estimates. JPMorgan forecasts 2020 EPS of $178 compared with a consensus of $186.

‘We believe an additional round of tariffs would increase the risk of pushing the US business and profit cycle into an outright contraction. Had the phase-three tariffs materialized, we estimated the first-order impact to be an additional hit of around $4 (cumulatively around $9) to S&P 500 EPS over one year,’ says Dubravko Lakos-Bujas, JPMorgan head of US equity strategy.

JPMorgan research maintains its positive stance on equities and keeps its trade probability-weighted S&P 500 price target at 3,000, given the base-case view that trading tensions do not escalate into a standoff.

But if trade talks fully collapse and phase-three tariffs are implemented without any indication of rollback, the S&P 500 could decline closer to 2,500, triggering both the ‘Trump Put’ – the Trump administration not letting the stock market fall – and the ‘Fed Put,’ which wouldn’t allow the situation to escalate by decreasing interest rates.

In a more positive scenario of a trade deal and tariff rollback, earnings should see positive revisions with the S&P 500 reaching around 3,200, notes the outlook.

Regionally, JPMorgan maintains its preference for the US versus Europe, despite a large 15 percent outperformance over the last year. In Asia, JPMorgan research recently moved overweight Japan equities.

‘We have been cautious on Japan for a while but have recently upgraded the country to overweight as the region has lagged and positioning in Japan is very light,’ says Mislav Matejka, head of global and European equity strategy at JPMorgan. ‘While we believe Chinese policy stimulus will be effective, we are neutral emerging versus developed markets going into the second half, given unexciting valuations and continuing trade concerns.’