Monthly Market Review - 4 February 2021 - J.P. Morgan Asset Management
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MARKET INSIGHTS
Monthly Market Review
4 February 2021
The big squeeze
The year started well but a confluence of factors set against elevated valuations led
markets to give up early January gains. The MSCI World Index fell by 0.7% over the
month, driven lower by the 1% fall in U.S. stocks. Emerging markets significantly
outperformed, gaining 3.8%, and Australia eked out a 0.3% return. Global bonds failed
to come to the rescue as the Bloomberg Barclays Global Aggregate index declined 0.9%
over the month (all total returns in local currency).
The positive sentiment in markets was always at risk from the high valuations across
assets. Initially, the global roll-out of vaccinations and the promise of further fiscal and
monetary stimulus helped the market to overlook pricing concerns and virus-driven
restrictions. Stimulus expectations rose after the surprise Democratic sweep in the run-
off election for the two Senate seats in Georgia, completing Biden’s blue wave.
However, over the month, concerns about the delay to vaccine supply increased as did
worries about their effectiveness against new viral strains of COVID-19, which would
delay the economic recovery. Simultaneously, some governments started to question
the need for further big budget stimulus. Inflation data around the world also came in
higher than expected, adding to fears of higher-than-expected yields and a reversal of
easy monetary policy.
The media was gripped by a group of small and relatively heavily shorted stocks which
rallied strongly on the back of retail demand and a short squeeze, forcing some hedge
funds into heavy repositioning. The influence of retail investors is not new and often not
persistent. Longer-term investors should focus on the likely strong rebound in growth
that will accompany the wider distribution of vaccines and economic re-opening.
Meanwhile, economic data continues to paint a picture of a better-than-feared
economic slump from the rising COVID-19 cases in the northern winter, leading to a
revision higher in economic forecasts. It is a similar situation locally. While politicians
and health officials remain highly sensitive to new cases and the introduction of
potentially more virulent COVID-19 strains, consumer and business attitudes towards
the economy are improved and the job market is improving faster than anticipated.
January’s markets may have felt the pressure from a range of concerns and the threat
Kerry Craig of COVID-19 may still linger, but the message from governments and central banks is
Global Market Strategist that policy will remain supportive for a while yet.
After a strong run in risk assets, a pause for breath is not an uncommon event. Staying
cautiously optimistic but with a balanced portfolio seems sensible during this
challenging period of the pandemic.MONTHLY MARKET REVIEW | FEBRUARY 2021
Economy: • As earnings season begins in Australia, the biggest question
• Low rates are impacting rate sensitive parts of the is how fast corporate earnings will return to pre-COVID
economy as house prices continue to rise. Nationally, levels. The earnings upgrades have supported the materials
house prices rose 0.7% month-over-month in January even sector and lifted expectations for financials given the
as the year-over-year (y/y) rate of price appreciation improving economic outlook. The late-run in earnings
slowed to 2.9%. Forward indicators for the housing market revisions mirrors the catch up performance by Australian
suggest more strength to come. Home loans have surged equities late in 2020 relative to the rest of the world.
since May (+59%) and increased 31.2% y/y for the month (GTM AUS P. 35)
of December, the fastest pace since 2009. (GTM AUS P. 10) • The 4Q20 U.S. earnings season took a back seat to other
• The housing market was not the only bright spot in the market developments in January as investors overlooked
local economy. The labour market added another 50,000 fundamentals. However, with almost 50% of the market cap
jobs in December and the unemployment rate fell to 6.6%. reported, 70% of the reported companies are beating
From here, it will be easier for employers to add hours to revenue expectations and 84% on earnings expectations.
existing workers rather than employ new workers. This Fixed income:
means the pace of improvement in the labour market may
• Global bond yields rose over the month as inflation
slow when it comes to the unemployment rate, but the
expectations rose. The U.S. 10-year Treasury yield rose by
underemployment rate is likely to show more
17bps to 1.09% and the Australian 10-year Australian
improvement. (GTM AUS P. 8)
Commonwealth Government Bonds by 12bps to a similar
• Inflation for 4Q20 was a stronger-than-expected 0.9% yield. The risk of higher-than-expected inflation is a key one
quarter-over-quarter (q/q), but largely driven by one-off to watch for both bond and equity markets if it elicits a
impacts to child care and excise tax on tobacco. Core response from central banks, something we think is
inflation was a more subdued 0.4% q/q. The higher unlikely. (GTM AUS P. 57)
inflation rates will be welcome news to the Reserve Bank
• The first meeting of the year for the U.S. Federal Reserve
of Australia (RBA), but unlikely to move the needle on
(Fed) was a stoic one, opting to keep policy unchanged and
monetary policy. (GTM AUS P. 7)
pushing aside any notion of tapering the current USD
• U.S. and European economic data are improving despite 120billion in monthly bond purchases for now. However, the
COVID-19 restrictions. Inflation is running faster than Fed is likely to become more vocal on tapering bond
expected and the unemployment rate has not deteriorated purchase toward the end of the year as the economic
(6.7%). There has been some slowing in global Purchasing recovery gains traction, but it will be a slow process.
Managers Indices in January but most markets are close to
• Credit markets had a poor month on rising yields. Global
or above the key threshold of 50. (GTM AUS P. 15)
investment grade bonds were down 1.0% and USD
• As countries around the world continue to implement emerging markets debt by 1.8%. However, high yield
various restrictions on mobility, a key determinant of the continued to post positive returns, with U.S. high yield
growth outlook is vaccine distribution. Despite some returning 0.4% for the month. (GTM AUS P. 54)
hiccups, progress is being made. The UK and the U.S. have
Currencies and commodities:
vaccinated 14% and 9% of their population respectively.
However, it is still early in the process, with many other • The Australian dollar raced higher over 2020 thanks in
countries only just starting their vaccination programs. large part to rising iron ore prices and a risk-on mentality in
markets. However, the Australian dollar peaked at 77.8c
Equities:
against the greenback in January and the U.S. dollar has
• The ASX 200 rose 0.3% in January, a mild gain over the been on the rise again since the shift in risk sentiment. The
MSCI World’s 0.7% decline. Consumer discretionary Australian dollar fell by 0.6% versus the U.S. dollar over the
(4.7%), communication services (2.7%) and financials month. (GTM AUS P. 66)
(2.2%) were the stronger performing sectors. Meanwhile
• The price of a barrel of Brent crude oil rose USD 4 over the
real estate (-4.4%), industrials (-3.0%) and health care (-
month to close at USD 56 per barrel. The rising price is a
1.9%) sectors lagged.
function of both vaccine prospects, rising demand, and a
surprise supply cut from Saudi Arabia. Elsewhere,
commodity prices pulled back from their monthly highs. The
price of iron ore hit USD 170 / Mt before ending the month
at USD 168 / Mt. Gold was also lower at USD 1,864 / oz.
J.P. MORGAN ASSET MANAGEMENT 2Global Purchasing Managers’ Indices GTM – Australia | 15
Manufacturing and services PMI
Index
62 Recession* 62
58 58
Global economy
54 54
50 50
46 Manufacturing 46
42 42
Services
38 38
34 34
30 30
26 26
22 22
'98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20
Source: Markit, J.P. Morgan Asset Management. *Recession is U.S. economic recession.
Guide to the Markets – Australia. Data as of 31 January 2021.
3Consumer and business confidence GTM – Australia | 5
Consumer sentiment and business confidence Consumer sentiment and retail sales
Z-score Year-over-year change 3-month moving average
Australian
economy
4 15% 110
Consumer sentiment Consumer sentiment
Business confidence
2 105
10%
0 100
5%
-2 95
0%
-4 90
-5%
-6 85
Retail sales growth
-8 -10% 80
'99 '01 '03 '05 '07 '09 '11 '13 '15 '17 '19 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20
Source: FactSet, Westpac, J.P. Morgan Asset Management; (Left) National Australia Bank; (Right) Australian Bureau of Statistics.
Guide to the Markets – Australia. Data as of 31 January 2021.
4Unemployment and wages GTM – Australia | 8
Unemployment and underutilisation rates Wage growth
Seasonally adjusted Year-over-year change, excluding bonuses
Australian
economy
8.0% 21% 5.0% 5%
Unemployment rate Wage growth Underemployment rate
(inverted)
7.5% 6%
4.5%
Dec 2020:
19%
6.6%
7.0%
7%
Dec 2020: 4.0%
Dec 2020:
6.5% 15.1% 9.4%
17% 8%
3.5%
6.0%
9%
5.5% 15% 3.0%
10%
5.0%
2.5%
13% 11%
4.5%
2.0%
12%
4.0%
11%
1.5% 13%
3.5%
Underutilisation rate 3Q20:
1.2%
3.0% 9% 1.0% 14%
'98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20 '99 '01 '03 '05 '07 '09 '11 '13 '15 '17 '19 '21
Source: Australian Bureau of Statistics, FactSet, J.P. Morgan Asset Management.
Guide to the Markets – Australia. Data as of 31 January 2021.
5Inflation GTM – Australia | 7
CPI and core CPI inflation
Year-over-year change Average 4Q20
Australian
economy
12% Headline CPI* 3.5% 0.9%
11% Core CPI 3.6% 1.3%
Tradables 2.7% -0.6%
10%
Non-tradables 4.2% 1.5%
9%
8%
7%
6%
5%
4%
3%
RBA target
RBAtarget
RBA band
targetband
band
2%
1%
0%
-1%
'83 '88 '93 '98 '03 '08 '13 '18
Source: Australian Bureau of Statistics, FactSet, J.P. Morgan Asset Management. *CPI is the Consumer Price Index, core CPI is the average of the trimmed mean
and weighted median measures of inflation. Tradables represent approximately 35% of the CPI basket and non-tradables 65%. Core goods CPI is goods CPI
excluding volatile items.
Guide to the Markets – Australia. Data as of 31 January 2021.
6Residential real estate prices GTM – Australia | 10
Capital cities house prices Auction clearance rate and house prices
Year-over-year change, 3-month moving average 3-month moving average Year-over-year change
Australian
economy
25% 85% Auction clearance rate 20%
House prices
(adv. 5 months)
20%
15%
75%
15%
10%
10%
65%
5% 5%
55%
0%
0%
-5%
Sydney
45%
Melbourne -5%
-10% Adelaide, Brisbane,
Canberra average
Perth
-15% 35% -10%
'07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20
Source: RPD CoreLogic, J.P. Morgan Asset Management.
Guide to the Markets – Australia. Data as of 31 January 2021.
7Global inflation GTM – Australia | 20
Headline consumer prices
Year-over-year change, quarterly
Below trend Inflation running Above trend
2020
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Nov Dec
Global economy
Developed Markets
U.S. 1.2% 1.3%
UK 0.3% 0.6%
Eurozone -0.3% -0.3%
Japan -1.0% -1.2%
Australia 1.4% 1.5%
China -0.5% 0.2%
India 6.9% 4.6%
Korea 0.6% 0.5%
EM Asia
Taiwan 0.1% 0.1%
Indonesia 1.4% 1.7%
Malaysia -1.7% -1.4%
Thailand -0.4% -0.3%
Brazil 4.3% 4.5%
Other EM
Mexico 3.3% 3.2%
Russia 0.9% 1.9%
Turkey 14.0% 14.6%
South Africa 3.2% 3.1%
Source: Department of Statistics Malaysia, DGBAS, Eurostat, FactSet, Goskomstat of Russia, IBGE, India Ministry of Statistics & Programme Implementation, INEGI,
J.P. Morgan Economic Research, Korean National Statistical Office, Melbourne Institute, Ministry of Commerce Thailand, Ministry of Internal Affairs & Communications
Japan, National Bureau of Statistics China, Office for National Statistics UK, Statistics Indonesia, Statistics Institute Turkey, Statistics South Africa, U.S. Department of
Labor, J.P. Morgan Asset Management. Quarterly averages, with the exception of the two most recent figures, which are single month readings, are shown. Colours
are based on z-score of year-over-year inflation rate relative to each country’s own 10-year history where red (blue) indicates inflation above (below) long-run trend.
EM represents emerging markets.
8 Guide to the Markets – Australia. Data as of 31 January 2021.Global equities: Sources of return and valuations GTM – Australia | 34
Sources of return Global valuations
2021 YTD total return, AUD Current and 20-year historical valuations* Axis
6% 40x 5.2x
Current
20-year range 4.8x
35x 20-year average
4% 4.4x
4.0x
30x
3.6x
2%
25x 3.2x
Price-to-earnings
Price-to-book
21.3
Equities
2.8x
0% 20x
19.9 18.1
16.4 2.4x
19.2
15x 2.0x
2.1 2.1
-2% 1.6x
Currency effect
10x
Multiples* 1.2x
-4% Dividends 0.8x
5x
EPS growth
0.4x
Total return
0x 0.0x
-6%
U.S. World Australia Japan Europe EM Asia ex-JP
EM Australia World Japan U.S. Europe
Source: FactSet, MSCI, Standard & Poor’s, J.P. Morgan Asset Management.
All return values are MSCI indices except the U.S. and Australia, which are the S&P 500 and ASX 200, respectively. *Multiple expansion is based on the forward P/E
ratio and EPS growth outlook is based on NTMA earnings estimates. Chart is for illustrative purposes only. Past performance is not indicative of future results.
Guide to the Markets – Australia. Data as of 31 January 2021.
9Global equities: Earnings and revisions GTM – Australia | 35
Earnings growth Earnings revisions ratios
Earnings per share, year-over-year change 13-week moving average
50% 60%
2019 2020 2021
40% 38%
35%
40% U.S.
30% 26% Japan
24% Australia
20%
20% EM
Europe
Equities
10% 0%
2%
-2%
0%
-1% -20%
-3% -4% -4%
-10%
-15% -40%
-20%
-30% -60%
-31%
-40%
U.S. EM Asia Pacific ex- Europe -80%
Japan '13 '14 '15 '16 '17 '18 '19 '20
Source: J.P. Morgan Asset Management; (Left) Thomson Reuters Datastream; (Right) FactSet, MSCI, Standard & Poor’s.
Guide to the Markets – Australia. Data as of 31 January 2021.
10Australia sector earnings and valuations GTM – Australia | 40
ASX 200 earnings per share growth estimates ASX 200 valuation
Year-over-year % change Forward price-to-earnings ratio
80% 60% 90x
2021 Current
60% 80x 15-year range
2020 40%
2021 relative to 2019 (rhs) 15-year average
40% 70x
20%
20% 60x
0% 0% 50x
Equities
40x
-20%
-20%
30x
-40%
-40% 20x
-60%
10x
-80% -60%
Staples
Materials
Estate
Info Tech
Health
Cons.
Financials
Energy
Utilities
Services
ASX 200
Industrials
Comm.
Disc
Care
Cons.
Real
0x
Weight
(%) 1.4 4.1 5.9 6.6 10.3 20.2 7.8 100.0 4.5 28.4 3.7 7.1
Source: FactSet, Standard & Poor’s, J.P. Morgan Asset Management.
Guide to the Markets – Australia. Data as of 31 January 2021.
11Inflation expectations GTM – Australia | 57
Inflation expectations Yield curve spread
5-year 5-year inflation swap rate U.S. 10-year minus 2-year yield, basis points
4% 300
250
3%
U.S.
200
2%
150
1% Eurozone
Fixed income
100
0%
Japan
50
-1%
0
-2% -50
'07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20
Source: FactSet, J.P. Morgan Asset Management; (Left) Bloomberg Finance L.P.; (Right) Tullet Prebon.
Guide to the Markets – Australia. Data as of 31 January 2021.
12Fixed income valuations GTM – Australia | 54
Spreads across fixed income sub-sectors
Basis points
1,200
Current
10-year range
10-year average
1,000
800
641
600
448
Fixed income
407
400
383
213 321
200 126 253
242
73
0
U.S. high U.S. Euro high Euro USD USD China USD Asia USD EMD USD EMD Local EMD
yield investment… yield investment… Asia… offshore credit high yield corporates
Source: iBoxx, ICE BofA, J.P. Morgan Economics Research, J.P. Morgan Asset Management. Based on J.P. Morgan Domestic High Yield Index (U.S. high yield), J.P.
Morgan U.S. Liquid Index (JULI) (U.S. investment grade), J.P. Morgan Euro High Yield Index (Euro high yield), iBoxx EUR corporates (Euro investment grade), J.P.
Morgan Asia Credit Index (JACI) (USD Asia credit), J.P. Morgan Asia Credit China Index (USD China offshore credit), J.P. Morgan Asia Credit High Yield Index (USD
Asia high yield), J.P. Morgan EMBI Global (EMD USD), J.P. Morgan Corporate Emerging Markets Bond Index – CEMBI (USD EMD corporates), J.P. Morgan GBI-EM
Global (Local EMD). Positive yield does not imply positive return. Past performance is not a reliable indicator of current and future results.
Guide to the Markets – Australia. Data as of 31 January 2021.
13Australian dollar GTM – Australia | 66
Iron ore price and FX Short rates (bps) and FX
2-year U.S. / Australia Treasury difference
180 250 1.00
Iron ore price AUD / USD AUD / USD
1.05
160 200 0.95
140 150 0.90
0.95
120 100 0.85
100 0.85 50 0.80
80 0 0.75
0.75
60 -50 0.70
asset classes
40 -100 0.65
0.65
Other
20 -150 0.60
Spread (bps)
0 0.55 -200 0.55
'14 '15 '16 '17 '18 '19 '20 '21 '14 '15 '16 '17 '18 '19 '20 '21
Source: FactSet, WM/Reuters, J.P. Morgan Asset Management; (Left) Commodity Research Bureau; (Right) Tullett Prebon. Past performance is not a reliable
indicator of current and future results.
Guide to the Markets – Australia. Data as of 31 January 2021.
14U.S. dollar GTM – Australia | 68
U.S. dollar index
130 3.0%
U.S. minus DM 10-year
Dollar index*
government bond yield**
Recessions
2.5%
120
2.0%
110
1.5%
100
1.0%
90
0.5%
80
0.0%
asset classes
Other
70
-0.5%
60 -1.0%
'96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20
Source: FactSet, OECD, Tullett Prebon, WM/Reuters, J.P. Morgan Asset Management.
*The U.S. dollar index is the nominal trade-weighted index of major trading partners’ currencies. Major currencies are the British pound, Canadian dollar, euro,
Japanese yen, Swedish Kroner and the Swiss franc. **DM is developed markets and the yield is a GDP-weighted average of the 10-year government bond yields of
Australia, Canada, France, Germany, Italy, Japan, Switzerland and the UK.
Guide to the Markets – Australia. Data as of 31 January 2021.
15J.P. Morgan Asset Management – Risks & disclosures The Market Insights program provides comprehensive data and commentary on global markets without reference to products. Designed as a tool to help clients understand the markets and support investment decision-making, the program explores the implications of current economic data and changing market conditions. For the purposes of MiFID II, the JPM Market Insights and Portfolio Insights programs are marketing communications and are not in scope for any MiFID II / MiFIR requirements specifically related to investment research. Furthermore, the J.P. Morgan Asset Management Market Insights and Portfolio Insights programs, as non-independent research, have not been prepared in accordance with legal requirements designed to promote the independence of investment research, nor are they subject to any prohibition on dealing ahead of the dissemination of investment research. 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All rights reserved. Prepared by: Kerry Craig, Tai Hui, Jasslyn Yeo, Marcella Chow, Ian Hui, Agnes Li and Chaoping Zhu. Unless otherwise stated, all data are as of 31 January 2021 or most recently available. Material ID: 0903c02a82674e7f
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