Volatility here to stay says J.P. Morgan’s Pérez
César Pérez (pictured), chief investment strategist for J.P. Morgan Private Bank in EMEA, comments on current market volatility and the factors investors need to be prepared for in 2015.
“We believe that volatility in global markets is here to stay, while decent corporate earnings on the back of positive economic growth in developed markets will be the key investment theme for the next year. Unlike 2014, we believe the probability of the central scenario is lower and tail risk probability will be higher, both for positive and negative scenarios. In Europe, fast credit growth is a potential positive tail event. An increased risk of political disruption is a potential negative tail event, especially with several elections coming up in the Euro area (including the Spanish general election).
“Factors such as improving consumer confidence, declining bond yields, currency depreciation, less fiscal drag and the drop in energy prices are working in favour of corporate profitability and GDP growth for 2015. We believe these factors should support a recovery of domestic consumption in Europe. Low inflation has taken hold across the Euro area and is the region’s major risk. The ECB will also be challenged by political uncertainties which might drag down countries with a slow moving reform agenda. In 2015, investors need to see the ECB acting as a safety net against deflation and show its commitment through quantitative easing before paying a premium for European assets.
“Global growth is recovering and is projected to grow between 3.5% and 3.7% this year. It is important to note that the additional growth has started coming in largely from developed markets. Emerging markets are still growing (our forecast is 5% for 2015 for EM and 2.3% for developed markets) but less fast relative to the last year than developed markets. As a consequence of that we favour developed markets much more than emerging markets.
“Regarding equities, we expect much of the growth in returns to come from earnings and dividend growth. The US GDP is expected to be around 3%; the earnings growth is going to be about 6% to 8% and dividend growth of 2%. In Europe, GDP growth is expected about 1.2%, while earnings growth is pegged at 7% to 8% and dividend growth at 3.5%. Largely, across the developed world, improved delta GDP growth and strong corporate earnings is the story behind higher returns.
“Oil price decline is expected to be a big growth boost for the emerging markets and European economies. The oil price decline creates a positive delta for the consumers in Europe and not just in terms of better cost structures for companies. At a macro level it will feed into energy prices and ultimately the spending capacity of individuals. We also expect lower energy prices to keep inflation moderate and thus avert the danger of a tail risk coming from that side. For the US economy, we expect the overall effect of lower oil prices to be flat to mildly positive, as capex will also decrease.
“In the absence of supply discipline in the market, oil prices are expected to remain low. For many oil suppliers, there are domestic economic factors that are expected to keep the supply high in the international market. Additionally, analysts say the Middle East suppliers would tolerate price decline up to a level it matches the cost of US shale oil. The continued higher supply could be tactical to prevent US producers from working on new high cost supply sources. We keep in mind that despite the obvious benefits to consumers, a prolonged slump in oil prices could have serious implications for investments into new oil production.”