JPM: US financials to outperform global peers

Added 20th July 2016

US and Asian equities are preferred when investors’ risk appetite improves, said JP Morgan Asset Management global market strategist Ben Luk.

JPM: US financials to outperform global peers

The global risk appetite index, which measures the relative risk-adjusted performance of high volatility versus low volatility assets across bonds and equities, has remained negative since early this year, according to the firm’s quarterly data guide.

Luk suggested that risk appetitie could improve over the course of the year. Brexit is unlikely to cause a global downturn, Q2 earnings in the US could show modest improvement and some sectors in the US have shown they can maintain strong fundamentals.

“Overall, the global financial firms have a negative outlook amid more regulations and limited earnings potential," he said at a briefing on Monday.

However, he prefers the US financial sector. "US banks have better fundamentals, and are supported by a relatively higher interest rate environment in the country.”

Despite US indices hitting an all-time high, he expects 6.5% earnings growth in Q2. "given the weaker dollar and rebounding oil prices". 

The consensus analyst estimates on S&P 500 earnings per share have increased to $31.69 per share from $24 in the first quarter of the year, according to the firm’s quarterly data guide.

US oil companies might also record a decent rise in earnings for the first time since 2015, he believes.  

But the report noted that margins across all US equity sectors "may come under pressure as unit labour costs rise, particularly as the tailwinds of lower commodity prices fade. The risk is that wage growth rises faster than expected in the US, putting pressure on corporate profit margins.” 

The firm also has a preference for Asian equities. Luk said Korean and ASEAN region stocks, in particular Indonesia and Thailand, are likely to outperform.

“These nations still have the capability to lower the interest rates as there’s no pressure on inflation, and they are set to benefit from a flattening US dollar."

Korean stocks also have cheap valuations, he added.

In fixed income, for investors who chase quality yield, the firm recommends US investment grade corporates and Asian bonds.

The former offers decent yield at around 3.5% while the latter have 80% of bonds at investment grade level, he explained.

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