Rudi’s View: Banks, Gold, Lithium & US Equities

Rudi's View | 5:07 PM

JP Morgan has updated its 10-year outlook for global assets, while brokers line up their preferred exposures to lithium and gold, and among Aussie banks.

• Not Too Shabby: The Ten Years Ahead
• Longview Sees Bull Market Bounce Ahead
• The Gold Opportunity
• Lithium's Re-Rating
• No Buy Ratings For Aussie Banks

By Rudi Filapek-Vandyck, Editor

Not Too Shabby: The Ten Years Ahead

US equities stand to lose some of their valuation premium vis a vis the rest of the world, but enduring 'US exceptionalism', led by AI and the Magnificent Seven, will keep profit margins high and growth among the world's best.

The result is ongoing positive investment returns for the decade ahead, despite a much higher starting point on historically above average PE multiples.

Such is one of the key conclusions from the 30th edition of JP Morgan's Long-Term Capital Market Assumptions.

As explained during today's media presentation by Global Market Strategist Kerry Craig, the research behind the economic and financial markets' projections for the ten years ahead is much more than simply an academic exercise; these are the backbones and benchmarks from which investment teams and decision makers inside JP Morgan's global organisation take guidance.

At the macro level, the global economy is facing multiple growth constraints, including rising economic nationalism and growing labour constraints --both make economies less efficient-- but technology (AI) and more government spending are expected to compensate.

The technology narrative itself is expected to migrate from creators to users.

All in all, US large cap equities are projected to return an average of 6.7% per annum over the decade ahead, unchanged from a year ago, which is no longer significantly higher than non-US markets.

The US dollar is also expected to devalue further and this will have an impact on currencies and thus on investment returns when measured in local currencies.

The underlying message from JP Morgan's updated projections is thus not only is the relative gap between US equities and the rest of the world expected to narrow noticeably, national currencies will increasingly impact on foreigner's return from US assets and vice versa.

For example, on JP Morgan's projections US large cap equities will only return 6.2% on average when measured in Aussie dollars. The local market's projected return is 7% (ex franking).

Japanese equities are expected to return 8.3% in Aussie dollar terms, against 7.3% for Emerging Markets.

Today's starting point for US equities is at elevated multiples (25x trailing PE), but AI development and adoption, continued strong growth and above-average profit margins imply the coming PE de-rating should remain rather benign.

The high starting point in terms of valuation for US markets is projected to reduce future returns by -2.0% per annum over the next ten years, so the net effect is not immaterial.

Historically, the market multiple for US equities has averaged around 16x but modern times of Megacaps and higher profit margins mean the equilibrium has probably shifted to a multiple of 19.5x, explained Leon Goldfield, Co-Head of Multi-Asset Solutions APAC.

The calculated corresponding multiple for non-US equities stands at 15x.

As stated, the implication is US equities will lose some of their premium relatively to the rest of the world, but they retain a relative valuation premium nevertheless.

In economic terms, JP Morgan's outlook assumes AI will ad 0.1%-0.2% to annual GDP growth, based on conservative assumptions.

Virtually every country is now facing growth headwinds from labour constraints, except traditional immigration destinations such as Australia.

While successful AI implementation is expected to further increase profit margins, eventually increased competition is expected to shave off a net -0.5% over the decade ahead.

In revenue terms, US companies will continue growing above most of the rest of the world, except for Emerging Markets; 6.0% on average versus 6.8%.

Companies inside Emerging Markets are still less efficient (i.e. less profitable) and while this offers great opportunity further out (a la Japan more recently) for now this implies a relatively lower valuation and non-maximised returns.

Inflation is assumed to become more volatile and overall higher than pre-covid, but central banks are still expected to pull the numbers back inside their targeted range.

The main implication here is: bonds are back, offering attractive investment return.

The second conclusion drawn is that investment portfolios can achieve higher return on lower volatility by including alternative assets such as real estate, commodities, private equity, corporate credit, and gold.

Longview Sees Bull Market Bounce Ahead

In early November, Chris Watling, chief market strategist at Longview Economics, suggested to investors it was time to start rebuilding overweight portfolio positions in US and global equities.

Markets have been volatile and net weaker since, but Watling is sticking to that view, albeit with some caution.

It remains possible for markets to fall further and weaken the technical foundations underneath, but Watling remains of the view current tribulations are nothing but a temporary pullback of typically -5-10%, after which the bull market uptrend should resume.

By now, many of Longview's market timing models are moving back towards generating Buy signals and Watling expects these signals to improve further (and thus effectively start generating Buy signals).

In response to widespread angst about 'bubbles bursting', Watling's response is history shows this usually occurs when cheap money is removed.

In the current context, however, the Federal Reserve is still cutting interest rates and liquidity is about to become more plentiful.

"With cheap money likely to persist, the bubble should continue to inflate".