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Q3 2021

Capital Markets Outlook

July 2021

 

Highlights

Macro
  • The recovery continues to gather pace, but we’re not out of the woods yet

  • Inflation should ease back next year if current upward pressure proves to be transitory
Rates
  • Longer-maturity yields in the US could see more pressure but are unlikely to head back to pre-pandemic levels

  • Favor Australia and China among global rates
Credit
  • CRTs are benefiting from strong technicals and healthy fundamentals

  • European credit offers value
Emerging-Market Debt (EMD)
  • EM can help to boost returns and benefit from positive developments

  • Favor hard-currency sovereigns
Equity
  • What’s driving share prices? Earnings are back in focus

  • Evolving economic cycles demand factor diversity, and selectivity Is key
 
  1. Rates
  2. Credit
  3. EMD
  4. Equity

Macro

The Recovery Continues to Gather Pace, but We’re Not Out of the Woods Yet

US Growth Should Return/Surpass the Precrisis Trend in the Near Term
US Real GDP Forecast and Precrisis Path

As of June 30, 2021
Source: Haver Analytics, Refinitiv and AB

Growth in Europe Unlikely to Return to Precrisis Trend Anytime Soon
Euro-Area Real GDP Forecast and Precrisis Path

As of June 30, 2021
Source: Haver Analytics, Refinitiv and AB

US Total Nonfarm Payrolls Still Down About 7.7 Million Jobs Since February 2020

Through May 31, 2021
Source: Haver Analytics, Refinitiv and AB

Historical analysis does not guarantee future results.

Rates

Longer-Maturity Yields in the US Could See More Pressure but Are Unlikely to Head Back to Pre-Pandemic Levels

The Yield Curve Has Steepened Significantly, and This May Continue…
Two-Year vs. 10-Year Treasury Spread

Through June 30, 2021
Source: Bloomberg, US Federal Reserve and AB

…but Long-Term Trends Highlight Limitations to Yields Rising Back to Pre-Pandemic Levels
10-Year US Treasury Yield

Through June 30, 2021
Source: Bloomberg, US Federal Reserve and AB

Past performance does not guarantee future results.

Credit

While High-Yield Returns Are Likely to Be Lower vs. Last Year, Opportunities Still Exist

While Spreads Tightened, the Quality of the HY Market Improved, Fallen Angels Entered and Riskier Credits Defaulted

Through June 30, 2021
Source: Bloomberg Barclays, J.P. Morgan and AB

Rising Stars Generally Tighten Prior to IG Entry
Rising Star Average Spread Premium over BBBs

Monthly data since 2001. Returns are annualized. 
As of February 28, 2021
Source: Bloomberg Barclays, J.P. Morgan and AB

BBs Look Compelling vs. BBBs
Ratio of BB to BBB Spreads

Through June 30, 2021
Source: Bloomberg Barclays, J.P. Morgan and AB

Historical analysis does not guarantee future results.
b.p.: basis points; HY: high-yield; IG: investment-grade; MV: market value

EMD

EM Can Help to Boost Returns and Benefit from Positive Developments

EM Have Performed Well in Prior Rising-Rate Environments*

As of June 30, 2021
Source: Bloomberg, IHS Markit, J.P. Morgan, S&P and AB

Flows Rebound as Investors Look for Yield
Cumulative Hard-Currency Fund Flows

As of June 30, 2021
Source: Bloomberg, IHS Markit, J.P. Morgan, S&P and AB

Issuance Is Expected to Decline
Sovereign Net Issuance (USD Billions)

As of June 30, 2021
Source: Bloomberg, IHS Markit, J.P. Morgan, S&P and AB

Historical analysis does not guarantee future results.
CEMBI: corporate emerging markets bond index; EM: emerging markets; EMBI: emerging markets bond index
EM sovereign is J.P. Morgan EMBI Global Diversified; EM Corp. is J.P. Morgan CEMBI Broad Diversified.
*Dates represent time periods where 10-Year US Treasury yields increased by at least 50 basis points.

Equity

What’s Driving Share Prices? Earnings Are Back in Focus. Differences in Regional Valuations Are Provocative

MSCI World Valuation and 2021 Earnings Estimates
2020 (Percent)

Past performance does not guarantee future results.
In both charts, earnings per share (EPS) estimates and P/E are based on the change in earnings estimates for the calendar year 2021 during the calendar year shown above. The change in EPS estimates and the MSCI World Index are shown in USD terms.
As of June 30, 2021
Source: FactSet, MSCI and AB

MSCI World
Price/Forward Earnings

Past performance and current analysis do not guarantee future results.
Based on forecast earnings for the next 12 months. UK represented by MSCI UK, emerging markets by MSCI Emerging Markets, Asia ex Japan by MSCI Asia ex Japan, Japan by MSCI Japan, Europe ex UK by MSCI Europe ex UK and US by MSCI USA
As of June 30, 2021
Source: FactSet, FTSE, MSCI and AB

Regional Valuation vs. MSCI World Valuation
Price/Forward Earnings Discount/Premium (Percent)

Past performance and current analysis do not guarantee future results.
Based on forecast earnings for the next 12 months. UK represented by MSCI UK, emerging markets by MSCI Emerging Markets, Asia ex Japan by MSCI Asia ex Japan, Japan by MSCI Japan, Europe ex UK by MSCI Europe ex UK and US by MSCI USA
As of June 30, 2021
Source: FactSet, FTSE, MSCI and AB

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