Recovery will boost earnings, but it’s already priced in: JP Morgan

The global earnings outlook for 2021 is probably better than many expect, JP Morgan says.

JPM Asset Management sees a boost to earnings through the year but expects returns will be more moderate as already-high valuations keep a lid on gains.. Picture: Gaye Gerard

Earnings expectations are too low for 2021, with the anticipated global economic recovery promising to deliver a boost to corporate earnings through the year, according to strategists at JP Morgan.

But risk asset returns will likely be more moderate as already-high valuations keep a lid on gains.

“In other words, much of the recovery is already priced (in),” JP Morgan Asset Management’s global multi-asset strategist, Patrik Schowitz, said.

“We are overweight risk going into 2021, balanced across both equities and credit. We expect the economic recovery will broaden out as the year goes on, and most major economies should be roughly back to where they were pre-Covid in GDP terms (China well above, however). This will feed into a substantial recovery in corporate earnings,” he said.

Ahead of any recovery, the economic path will be bumpy through the first quarter, the asset manager’s global market strategist Kerry Craig warned.

“Without the wide distribution of vaccines, the paths of COVID and the economy are locked together, given the impact on social mobility and economic curtailment,” he said.

“Investors should look through the bumpier start to the new economic cycle and focus on the improved earnings outlook and still supportive fiscal and monetary policy stance.

“Even if monetary and fiscal policy support may not increase as much in 2021 as it did in 2020, the fact that they are still at a very loose setting helps the outlook for risk assets like equities and credit.”

The comments come as the total number of COVID-19 cases around the globe climbed above 85 million, despite continued efforts to suppress the spread of the virus.

In the US alone, a record 299,000 people tested positive to the virus on Saturday, while deaths in the country related to COVID-19 have now exceeded 350,000.

In the UK, meanwhile, Prime Minister Boris Johnson has warned further restrictions may be needed to stem the rapid spread of the virus, which has so far claimed more than 75,000 lives in the country.

The UK has reported more than 50,000 cases per day for the past six days. Parts of England are currently under stage 4 restrictions but Mr Johnson over the weekend hinted at the introduction of further tightening as numbers continue to spiral.

The UK is slated to begin a rollout of the Oxford/AstraZeneca vaccine on Monday and was the first country in the world to approve and administer the Pfizer/BioNTech vaccine. More than 500,000 Britons have so far received the first dose of the vaccine.

The pace of distribution of vaccines is a key risk for markets, Mr Craig said, as he predicted further turbulence ahead.

The prospect of inflation rising faster than expected and a 2013-style “taper tantrum” are among the other risks on his radar.

“Inflation that rises faster than expected and pushes bond yields higher is another one to watch, as is the potential for a stronger economic outlook in the second half of the year to lead the market to price the risk of monetary policy tightening and possibly revive a 2013 style ‘taper tantrum’.

“However, while these are risks worth monitoring, they do not form our base case of steady economic improvement and modest inflation over the course of the year and a backdrop of relatively better political predictability than experienced in 2020.”