The J.P. Morgan View : Market pushes ahead with volatility low and froth building
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06 March 2024
The J.P. Morgan View
Market pushes ahead with volatility low and froth building
YTD returns by asset
Source: J.P. Morgan.
Cross-Asset Strategy: Equities have moved up this year, even as bond yields rose and rate cut expectations unwound. Investors may be assuming that the increase in yields is reflective of economic acceleration, but earnings projections for 2024 are coming down and the market appears too complacent on the cycle. With yields close to 2M highs, neutral positioning, and softer data expected in the coming week, we recommend adding duration in 5Y USTs and hold 5s/30s steepeners. We expect the ECB to remain firmly in data-watching mode at its March meeting, so we keep strategic longs in 5Y Germany but add 3s/10s EUR swap curve bear flatteners. US HG bond spreads remained in a tight range in February, with spreads tighter despite record issuance for the month, another reflection that supply follows demand. Euro HG spreads are likely to trade range-bound due to excess corporate cash balances being depleted, M&A activity picking up, and higher reverse Yankee issuance. In HY and LL, February registered a post-pandemic high in defaults. The most disruptive outcome for FX would be a hawkish Fed repricing, which as in 2023 would likely result in broad USD strength. But, unlike 2023, higher US yields should not automatically also result in positive returns from carry given thinner yield cushions. We expect a contraction in global gasoline demand in 2025 (the first on record, outside of recession) due to the shift to EVs and efficiency gains.
JPM Clients’ View: Click here to take this week’s survey. This week we poll investors on China, Bitcoin, the BoE and BoJ, in addition to our running sentiment questions. Our last survey results indicated: (1) equity exposure/sentiment among respondents is ~52nd percentile on average; (2) 32% planned to increase equity exposure, and 76% to increase bond duration near-term; (3) 60% believe the Feb CPI release is more likely to surprise to the upside than downside; (4) 79% see NVDA as overvalued, though only 28% believe it’s in a bubble; (5) respondents were close to evenly split both on whether Chinese equities are at a positive inflection point and whether the BoJ will exit negative rates in March.
Market pushes ahead with volatility low and froth building: Stocks continuing to push to new record highs and Bitcoin surging over $60k may indicate accumulating froth in the market. This may keep monetary policy higher for longer, as premature rate cutting risks further inflating asset prices or causing another leg up in inflation. We see a dichotomy in volatility markets: stock vol is near multi-year lows despite expensive valuations/elevated positioning/high concentration, rates vol remains stubbornly high given uncertainty around the timing/pace of rate cuts, and yet FX volatility has moved sharply lower despite elevated rates levels and vols.
New Trades: Initiated Jun25/Jun26 Euribor conditional bull steepener via 1Y and 2Y mid-curve calls, 10s/15s German steepeners (Bassi); bought worst-of calls on SPX, SX5E, NKY and KO calls/call ratios on SX5E (Silvestrini).
Upcoming Catalysts: Fed member speeches (all week); ECB meeting, US trade balance, Japan BoP (3/7); US payrolls, Euro GDP & China CPI/PPI (3/8).
Cross-Asset Strategy
Economics
Current-quarter growth looks stronger and more broadly based. Activity indicators are consistent with a moderation in GDP growth from its strong 2H23 pace, but have been firmer than we expected. As a result, our global growth forecasts are rising alongside the current-quarter data flow—continuing the general pattern of recent quarters. Together with solid US performance, the global economy is turning into the new year with greater balance, a point underscored by the February manufacturing PMI survey. The output survey took a significant step up in the first two months of the year and now aligns with our forecast for roughly 2%ar factory output growth in 1H24. It is encouraging to see a rebound in the orders/inventory ratio and the capital goods PMI, which lifts our CapexNow tracking for global equipment spending.
An expected rebound in US and Euro area core service price inflation. We maintained conviction that a sharp 2H23 slide in global core goods price inflation was ending while a material disinflation in services prices was unlikely this year. A wide array of global indicators pointed to fading goods deflation, whereas macroeconomic fundamentals—tight labor markets, elevated labor cost gains, and still-solid services demand gave us confidence that services prices would remain sticky. This mix of an end to goods price deflation and still elevated service price gains is on track to deliver core inflation at roughly 3%ar in both economies in 1H24. Our top-down views of resilience and sticky inflation appear inconsistent with the roughly 150bp easing currently priced for Fed and the ECB over 2024-25.
Looking for more fiscal ease in China. Policy supports in China are building as fiscal initiatives have been accompanied by a large ongoing injection of liquidity. We believe more will be needed to reach the 2024 growth target of ~5% and look to this week’s NPC for signs of what comes next. We expect the central government deficit target to be raised to 3.8% of GDP. The impact of this impulse on the economy will likely be tempered as local government sources of funding remain constrained. A key concern about policy support to date has been its bias toward increasing productive capacity rather than consumer demand. This resulted in a buildup of inventories pushing down domestic and export prices. Any sign of a shift in focus would be constructive (GDW, Mar 1st).
Equities
2024 EPS projections keep coming down. Why didn’t equities weaken as US 10Y yields backed up 50bp YTD? We think this is because investors assumed that the yields up-move is reflective of economic acceleration, but we note that earnings projections for 2024 are not reacting positively and the market is now too complacent on the cycle. In terms of drivers: 1) US activity momentum is expected to be sequentially weaker, in 0-1% real GDP growth range by mid-year. Labor markets remain a bright spot, but that can change quickly, and retail sales momentum is waning. 2) Repricing of Fed futures higher in the past weeks might not be just due to better growth outlook, but also more persistent inflation. 3) Profit margins are softening, topline growth is weakening, net interest expense is set to move back up, and ULCs could start increasing. 4) At 21x, US forward P/E is very stretched, especially vs real yields. 5) Sentiment and positioning indicators are near highs (Equity Strategy: March Chartbook, Mar 4th).
Nikkei 225 tops bubble era high. The end of 3 decades of deflation that began with the bubble’s collapse kicked off the current bull market. The bubble era high symbolizes Japan’s “lost three decades,” so the new high is being seen as highly significant, impacting sentiment for corporate managers and Japanese people as a whole. We also think this will spur corporates to increase growth investment and improve capital efficiency, and make investors take more interest in Japanese stock investing (Japan Equity Strategy, Feb 27th). We see don’t see signs that Japanese stocks are overheated, in particular from a longer-term perspective, and in index terms we see investment appeal even at current share price levels. Japanese corporate earnings rose on the whole in the Oct–Dec quarter, and the balance between profit growth and valuation multiples is not distorted in contrast to the bubble economy era (Japan Equity Strategy, Mar 3rd).
Bonds
Bond yields retraced some of the rise in the previous weeks, but remain elevated. With yields close to 2-month highs, markets pricing in a later start to easing and fewer cuts than we expect, our Treasury Client Survey continuing to point to an elevated share of neutrals and as we see softer-than-expected data in the coming week, we recommend adding duration in 5Y USTs. We also hold 5s/30s steepeners as a medium-term expression of our Fed view and as we see higher term premia over time given the rising share of price sensitive investors.
In the Euro area, a smaller-than-expected decline in CPI supports recent pushback from ECB speakers on near-term easing expectations, and we expect the ECB to remain firmly in data-watching mode at its March meeting. We keep strategic longs in 5Y Germany but add 3s/10s EUR swap curve bear flatteners as a tactical hedge. In the UK, we see little impact from the likely modest fiscal measures in the Spring budget. We hold tactical Aug24/Nov24 MPC OIS flatteners and Mar24/Sep24 SONIA futures curve flatteners.
Our EM client survey showed a slight reduction in already relatively modest net EM local duration longs, while longs in EM hard currency sovereigns rose to their highest level since Feb’23. We stay OW local bond duration, with OWs in Brazil, Colombia, Uruguay, Czechia, Poland, South Africa and Indonesia, partially offset by a short duration overlay and an UW in Romania (EM Fixed Income Focus, Feb 15th).
Credit
US HG bond spreads remained in a tight 8bp range in February. In yet another reflection that supply follows demand, spreads are tighter despite record issuance for a February, which is 28% higher than the prior record set just last year. This is notable given that March is typically the busiest supply month of the year. Inflows have not only increased overall this year but are also stronger m/m, unlike last year when inflows tapered off somewhat from Jan to Feb. We continue to see valuations as being expensive but yields remain attractive and risk assets more broadly remain on an uptrend. We also continue to view spreads as expensive here but recognize the risk that they could go tighter still if yields remain supportive and macro concerns continue to dissipate (Credit Market Outlook & Strategy, Mar 1st).
Euro HG spreads will likely trade range bound over the near-term between 130-140bp, in our view. We revise up our full year HG issuance forecast by €35bn to €550bn gross / €80bn net. This is driven by: 1) excess corporate cash balances being depleted; 2) M&A activity picking up; and 3) higher reverse Yankee issuance (European Credit Weekly, Mar 1st).
February registered a post-pandemic high in actual defaults and a 10-month high in volume affected by defaults/distressed transactions in HY and LL. Combined there were 12 defaults/distressed transactions totaling $9.9bn in bonds and loans. The difference between par and issuer-based default rates is the highest on record and underscores the impact distressed exchanges have had on default activity over the last few years. The distressed universe of bonds and loans is at a low since May 2022 (Default Monitor, Mar 1st).
The main narrative at the SFIG conference was that spreads have significantly tightened in mortgage credit and other parts of SPG, but there does not look to be a big catalyst for widening unless Fed expectations are significantly repriced. Investors remain neutral on mortgage credit and saw some value in agency MBS, jumbo 2.0 and non-QM AAA/Mezz. Money managers continue to see inflows and the insurance bid for duration remains strong. Given these dynamics, new issue deals continue to be multiple times oversubscribed. Higher loan size borrowers appear to be driving delinquencies higher in non-QM, which is surprising since a larger loan size is typically an indicator of borrower creditworthiness (RMBS Credit Commentary, Mar 1st).
Currencies
Upcoming US data will set the tone for FX. We consider a broad roadmap for select outcomes. 2023 offers clues given some similarities, but differences will be relevant as well. The most disruptive outcome for FX would be a hawkish Fed repricing, which as in 2023 would result in broad USD strength. Unlike 2023, higher US yields should not automatically also result in positive returns from carry given thinner yield cushions.
Macro Trade Recommendations: Take profit on EUR/SEK cash shorts but stay long SEK vs CZK in cash and EUR in options. Stay modestly long USD vs EUR & CAD via options amid lingering US exceptionalism and prospects of tariffs. Long JPY vs EUR in cash, vs USD and CHF in options. Short EUR/CHF in cash. Stay OW EM FX (FXMW, Mar 1st).
Commodities
Moving along the electrification road. 21.6 million electrified vehicles (BEV, PHEV, hybrids) were likely sold worldwide in 2023 or 33% of total auto sales. The market is moving from early adopters to early mass majority in Europe and China, while the US remains a nascent market. Sales of battery EVs are still rising, but the growth rate appears to be easing, while hybrids emerge as a bridge technology to pure EVs. Fully or partially electric vehicles are now a meaningful share of the fleet, representing about 7% of the global fleet, likely shaving ~500 kbd off global gasoline demand between 2019 and 2023, with 400 kbd of those from the US and China. Increasing pressure from electrification and efficiency gains will likely lead to a first on record, outside of recession, contraction in global gasoline demand in 2025 and a cumulative loss of 0.9 mbd by 2030 (Oil Markets Weekly, Feb 26th).
How much is a deviation from average Chinese seasonal inventory builds worth? Metals demand has been somewhat slow to hit its stride post LNY holiday, though inventories are still showing relatively tame builds, despite higher production in China. Copper stock builds fell back in line with normal seasonality last week while primary aluminum and zinc builds continued to undershoot. This year, copper and zinc prices have outpaced implied performance from seasonal Chinese stock build deviations while aluminum has lagged (Metals Weekly, Mar 1st).
Qatar LNG capitalizes on US policy uncertainty. Qatar announced further expansion of its LNG export capacity by 16 mtpa, just weeks after the Biden administration announced a pause in new LNG project approvals. As the new expansion is projected to come on line by 2030 and with no details known on financing, partnerships or contracting, we expect it to have no to minimal impact on our published global gas balances by 2030 (Global Natural Gas Flash Note, Feb 26th).
This week, we poll investors on China, Bitcoin, the BoE and BoJ, in addition to our running survey questions on equity positioning/sentiment, and intentions for near-term changes to equity allocation and bond duration. The results from the last survey are shown below.1
Figure 1: What is your current equity positioning or sentiment in historical terms, expressed from most bearish (0th percentile) to most bullish (100th percentile)?
Source: J.P.Morgan
Figure 2: Are you more likely to increase or decrease equity exposure over the coming days/weeks?
Source: J.P. Morgan.
Figure 3: Are you more likely to increase or decrease bond portfolio duration over the coming days/weeks?
Source: J.P. Morgan.
Figure 4: Do you think the February CPI release in mid-March is more likely to surprise to the upside or downside?
Source: J.P. Morgan.
Figure 5: In your view, Nvidia is:
Source: J.P. Morgan.
Figure 6: Are Chinese equities at a positive inflection point?
Source: J.P. Morgan.
Figure 7: Do you expect the BoJ to exit negative rates in March?
Source: J.P. Morgan.
JPM Clients’ View - This Week’s Interim Survey Results
The charts below show interim results from this week’s survey, collected over the first ~24 hours it was live. The survey remains open here, and we will show updated results in the next J.P. Morgan View publication
Figure 8: What is your current equity positioning or sentiment in historical terms, expressed from most bearish (0th percentile) to most bullish (100th percentile)?
Source: J.P.Morgan
Figure 9: Are you more likely to increase or decrease equity exposure over the coming days/weeks?
Source: J.P. Morgan.
Figure 10: Are you more likely to increase or decrease bond portfolio duration over the coming days/weeks?
Source: J.P. Morgan.
Figure 11: Do you expect China growth will surprise to the upside in the first half of this year?
Source: J.P. Morgan.
Figure 12: Does the surge in Bitcoin prices signal broad market frothiness?
Source: J.P. Morgan.
Figure 13: The market is pricing in 27bps of hikes by the BoJ this year – do you expect the BoJ to ultimately deliver more or less hiking than the market expects by year-end?
Source: J.P. Morgan.
Figure 14: Do you believe the BoE will unwind all of its QE portfolio, as Deputy Governor Ramsden suggested it might in remarks last week?
Source: J.P. Morgan.
Market pushes ahead with volatility low and froth building
January PCE came in line with consensus although below our expectations, with m/m for headline PCE at 0.3%, core PCE at 0.4%, and supercore (core ex housing) at 0.6%. Despite the strong January numbers, the year-ago inflation rates are still down from where they were six months prior, pointing to an ongoing moderation in the underlying trend of inflation. The activity data from the report, in particular some improvement on nominal income and employee compensation, led us to revise our 1Q US GDP growth estimate from 1.75% to 2.25% saar. With the PCE print in line with expectations, it produced a muted effect on markets, with long-end yields initially falling slightly only to reverse on weak month-end demand. More recently, Friday’s US data saw declines in consumer sentiment, ISM manufacturing, and construction spending – disappointing relative to consensus, but our economists do not see these results as alarming.
As for what to expect at the upcoming ECB meeting, our economists expect the ECB to remain on hold and maintain a data-dependent approach, as we wait for more clarity on inflation after the upward surprise in core this week as well as labor market developments. We expect the meeting to be mostly uneventful for Euro duration, with markets mostly focusing on the discussion around the new ECB staff projections as the growth and inflation projections likely will be an indicator of the direction of upcoming monetary policy decisions. Despite negative returns YTD, we are expecting an average return of +6.5% across DM bond markets, assuming our 2024 year-end yield targets are realized ( Figure 15).
The earnings season, now almost done in the US, confirmed our expectation discussed in last week’s publication, namely the continued outperformance of US versus Europe, in line with our regional allocation preference. So now with 93% having reported in the US, we have +8% earnings growth y/y, and with 70% reported in Europe, -11% y/y earnings growth, which is sequentially better in the US and worse in Europe. A similar outperformance of US over Europe was seen in earnings beats (+7% US vs -2% Europe) and revenue growth (+4% US vs -6% Europe), although sales beats were better for both. Looking ahead to the full-year 2024 outlook, a much smaller proportion of companies are raising EPS guidance, well below the historical median ( Figure 16).
With stocks at highs, we have described risk assets as priced to perfection, in other words, reflecting little risk to earnings growth, margins, economic growth, etc. Looking at the longer-term history, there is no shortage of periods where stocks stayed overbought for long periods of time, however we feel the current environment continues to leave us vulnerable to an accident. Whereas the earnings growth of the Magnificent 7 has been 56%, the S&P 500 ex Mag7 saw earnings shrink by 2% ( Figure 17). So currently, we have the uncomfortable choice of buying something already expensive albeit with good earnings growth, or something cheap, perhaps justifiably so with negative earnings growth.
When looking for a pullback off highs, it has been useful to get a sense of the froth in markets, and one measure that jumps out is the Bitcoin price at ~$63k. Alternatively, we might consider speculative tech ETFs, many of which have lost 2/3 of their value, but now seem to have bottomed and attempting to stage a comeback. The takeaway from these indicators is that there appears to be room for them to go further before we reach recent extremes of speculative excess, but thinking about how rising asset prices fits into the broader picture of central banks looking to cut rates, the effect is likely to make them even more wary given strong growth and inflation. The worry is that premature rate cutting could feed into inflating asset prices further or cause another leg up in inflation, but if the disinflation is still immaculate, ‘what’s the rush?’, paraphrasing Fed governor Waller.
With stocks at highs and VIX near multi-year lows, we consider whether volatility is generally cheap or not. While our US economics forecasts have us rebounding off Q2-Q3 growth of 0.5%, historically reaching such low levels has been a precursor to further worsening. Given the strong jobs market, cash cushion, US consumers and corporates shielded from rising rates, this time may be different, but we can still consider where vols should be assuming we’re late-cycle. Stock vol has been in the neighborhood of multi-year lows, making us nervous given stocks are expensive (relative to bonds and cash), well-owned, concentrated into megacaps, overly reliant on the AI story, and seemingly assuming zero chance of growth risk (by virtue of being at highs). Rates vol has remained stubbornly high which is logical in DM markets where there has been uncertainty around the timing and amount of rate cutting. In the past few weeks there has been this dichotomy of sharply lower FX volatility despite stubborn rates vols and higher US rates, so it appears that this may provide a decent entry point ( Figure 18). Our FX vs. rates model, after a steady compression over the past few months of 2023, is now seeing FX vols (average USD/G10) cheap by around 2.5-3 vol points ( Figure 19). We offer two general paths to benefit from low FX vols for a) FX carry trades via options and b) for playing hedges against higher rates scenario.
As for China, we look ahead to the upcoming NPC as a guide to the fiscal budget and other policy targets. We expect the annual growth target to be unchanged at ‘around 5%’ for 2024, which should be challenging as the uplift from reopening has faded. We expect both fiscal and monetary policy will be more growth-friendly than 2023 but not a ‘bazooka’ style stimulus. It would be a positive surprise if the work report shares the market concerns on economic challenges, such as deflation, unemployment, housing, etc. The budget deficit could be another source of positive surprise, assuming fiscal will contribute more to growth stabilization efforts. China’s February manufacturing PMIs were in-line with expectations with a decent uptick in the NBS non-manufacturing PMIs suggesting near-term growth momentum. Putting together the two pieces, the NBS composite PMI output stayed at 50.9, the highest level since October, suggesting steady economic activity momentum. There remain reasons to be cautious, with the employment component of PMI looking subdued, suggesting weak labor market will be a drag on household sentiment. Softness in pricing power and deflation generally should continue to hurt corporate profit, restraining the private investment outlook. And the housing market activity continues to be sluggish. Meanwhile, Chinese equities are still trading below our bearish target for the 2024, while buybacks rose 3.3-fold y-y in the first two months of the year. With Korean and Japanese regulators pushing for corporate governance reforms in favor of shareholder returns, China has followed suit with a new reform-minded CSRC Chairman, lifting hopes for more follow-throughs including China’s version of a comprehensive corporate governance reform scheme. Notably, Chinese listcos have substantially raised share buybacks YTD. MXCN constituents listed in A-share/HK that report buybacks on a high-frequency basis repurchased US$4.9bn in shares over 2M24, more than tripling (3.3x) the first two-month average of US$1.5bn over 2021-23.
With the global PMIs coming out, we revisit how the recent dislocations in the asset classes are shaping up. The ongoing theme is markets ‘priced to perfection’, looking expensive but not yet at the extremes we’ve seen in other late-cycle periods. Apart from the dislocation with the PMIs, there is the ongoing disconnect between earnings yields and bond yields, with tight risk premia arguing for conservative allocations. The combination of a good US earnings season and better than expected economic growth data, has for many justified the continued rally, but the flip side is that if the January strength persists, pushing back the start of cutting keeps us ‘high for long’, which should pose a strain on margins. Mitigating this is the unprecedented situation of rates going up, while company interest expense has gone down (thanks to borrowing at low fixed rates, while cash balances are earning more), which is the example of how the transmission of monetary policy tightness is blunted at least in the US. Of course, narrowly focusing on the disconnect with the PMIs can be misleading as Japan shows up expensive in this comparison vs global composite PMIs which we see as justified given the structural changes there. But the broader point remains of risk assets being overly optimistic relative to PMIs, expensive by about 1 standard deviation according to this simple framework ( Figure 20).
Figure 15: Since the beginning of the year, DM bonds have delivered negative returns across the board, turning positive by 2024 year-end, assuming our targets are achieved
Quarterly breakdown for 2023 and projected return until the end of 2024, %
Source: J.P. Morgan Global Fixed income
Figure 16: % of S&P500 companies guiding EPS higher/lower
Source: : J.P. Morgan Equity Research, Bloomberg Finance L.P.
Figure 17: S&P500 vs S&P500 ex Mag 7 Q4 ‘23 earnings growth
Source: Bloomberg Finance L.P., J.P. Morgan Equity Research
Figure 18: FX vol has moved down sharply especially compared to rates vol
Source: Bloomberg Finance L.P., J.P. Morgan.
Figure 19: FX volatility is now meaningfully cheap for the state of the global business cycle
VXY Global modeled as a function of Global PMI, trailing 12-mo standard deviation of Global PMI and dispersion of consensus US CPI, GDP and unemployment forecasts
Source: Philadelphia Fed, J.P.Morgan Currency Research
Figure 20: Dislocation of risky assets vs Global Composite PMIs
Corporate profit margins are elevated in a historical context and appear to be peaking out. We see 3 sources of downside to profit margins and to earnings from here: Many corporates benefitted from the unique feature of this cycle – as interest rates increased 300bp+, the net interest expense came down; top line was exceptionally strong post COVID for many corporates, as pricing power was high; and if the economy slows, partly because the supports that it enjoyed last year do not repeat, such as fiscal stimulus, ULCs could pick up. Profit margin proxy, corporate deflator minus ULCs, could turn into more of a headwind.
Despite record-high damages from extreme weather events, we see little impact on US home prices at the county level. Since 2000, homes in counties in the top quintile of climate and extreme weather risk have risen ~40% more in price than they did on average across all other counties. This is consistent with other evidence that Americans have moved on net towards areas with higher risk of extreme weather, instead of away from them. We show that population growth was higher on average in more exposed counties. While rising property insurance costs could force homeowners to focus on climate and extreme weather risk, it is unclear that property insurance prices have risen yet in line with risk.
Risk premia have compressed significantly over the past few months. Our long-term fair value model suggests the equity discount rate is at a similar level to the 2007 market peak and not far from levels at the 2000 peak. And the slope of the risk-return trade-off line, or the “expected Sharpe Ratio”, is currently at similar levels to its lows in 1989, 1998 and 2007. We estimate the potential equity selling by quarter-end due to rebalancing by US defined benefit pension funds and Norges Bank/GPIF/SNB could be up to $120bn with a similar amount of bond buying.
Consensus expectations for a substantial easing cycle ahead have remained firmly in place, however, with market pricing incorporating a roughly 150bp decline in policy rates for the Fed, ECB, and BoE by the end of next year. Two related arguments have reinforced expectations for a substantial policy easing over 2024-25 absent a slide into recession. First, the inflation surge of 2021-23 that prompted an unprecedented, synchronized DM policy tightening is fading fast as negative supply shocks related to the pandemic and Russia’s invasion of Ukraine have been removed from the scene. Second, neutral real policy rates were pushed significantly lower over the past decade and, as a result, the current stance of monetary policy is materially restrictive.
Recognizing the elevated noise in the January data, particularly in the US, we highlight two signals in the global CPI data. First, core goods prices ex. US autos rose 0.16% m/m in January, a firming that aligns with global developments pointing to an end of global goods price deflation in 1H24. Second, the 0.5% m/m rise in service prices, boosted by a 0.7% jump in the US, likely exaggerates underlying trends but points to continued stickiness in service price inflation. We see global core inflation (ex-China and Türkiye) ticking higher to 3.3% in 1Q24 before easing to 2.8% in 2Q24.
We expect the NPC will keep its annual growth target unchanged at “around 5%” in 2024, which will be a challenging task as the reopening dividend has largely faded. To achieve the target, we have argued that both fiscal and monetary policy will be more growth-friendly than 2023, but not a “bazooka” style stimulus. On fiscal policy, we look for a 3.8% of GDP budgetary deficit, which could be in the form of 3% official deficit plus 1tn yuan special central government bonds. We also expect the government to reiterate its monetary policy narrative with expanded use of structural monetary policy.
We continue to see valuations as being expensive but yields remain attractive and risk assets more broadly remain on an uptrend. There seems to be some recent supply indigestion in IG over the past few days with new issue bonds underperforming the overall index by 2bp over the past 10 days versus typical outperformance (~4bp on average since 2015). We believe these are only short-lived effects of the supply surge and should normalize soon as there do not appear to be any real cracks in the demand technicals at this juncture.
On a global scale, increasing pressure from electrification and efficiency gains should ultimately offset demand increases in emerging markets like India, Africa, and other APAC countries, leading to a contraction in global gasoline demand of 50 kbd in 2025, 100 kbd in 2026 and a cumulative total loss of 0.9 mbd by 2030. Fully or partially electric vehicles represent now 7% of the global fleet, likely shaving almost 500 kbd off global gasoline demand between 2019 and 2023, with 400 kbd of those from the US and China. Sales of battery EVs are still rising, but growth rate appears to be easing, losing market share to hybrids.
As Qatar’s new LNG expansion is projected to come on line by 2030 and with no details known on financing, partnerships or contracting, we expect it to have no to minimal impact on our published global gas balances by 2030. Our balances implied abundance of supply by 2030, and the announcement adds to potentially oversupplied global gas/LNG market beyond 2030. However, we note potential upside in the longer-term gas demand as countries remain cautious on nuclear growth and LNG remains the major viable option to substitute coal in the power generation mix.
Following the latest news of NYCB identifying weaknesses in controls related to internal loan review, along with both NYCB’s Chief Risk Officer and Chief Audit Executive recently departing and the bank’s credit ratings agencies taking actions in response to 4Q23 results, the risk profile of this stock remains outside of our comfort zone. Even with shares trading at 0.4x 2024e TBV or at a 62% discount to peers, we see the prudent strategy for investors being to stay on the sidelines and maintain our Neutral rating. We also continue to view the situation at New York Community as being very specific to NYCB and not representative of pressure/uncertainty on regional banks more broadly.
The EM fixed income sustainable debt asset class is now $1.1tn in size, making it 11% of the EM hard currency debt stock but only 3% of EM local currency debt. Use-of-proceeds bonds are the largest part of the asset class, with Green bonds dominating at 62% of outstanding notional, Sustainability bonds have 16% of outstanding and Social bonds 10%. We also look at new developments for the EM fixed income sustainable debt asset class, focusing on the emerging themes around biodiversity and adaptation, as well as development finance and impact investing.
We recently conducted a survey of 45 US physicians (endocrinologists/diabetologists, cardiologists, and primary care physicians) on their current and expected future GLP-1 use and wanted to share our key takeaways. Respondents see broad use of incretins in both the obese as well as overweight populations with weight-related comorbidities a major factor into their prescribing decision.
Our EMEA coverage has the highest concentration exposure to Europe, with 179 companies having 60%+ revenue exposure to the region, with Banks making the highest proportion of this (22 companies). Overall, the countries/region where our European coverage has the highest average revenue exposure is to Europe (42%), the UK (22%) and the USA (18%). Meanwhile, Healthcare has the highest average revenue exposure to the US (35%), Financials to the UK (32%) and Europe (51%) and TMT to India (3%).
Tech demand continues to remain polarized, with all things AI continuing to see strong demand in the near-term and the number of beneficiaries in the AI space starting to broaden out as AI Inference in the Datacenter ramps up and in preparation for bringing AI to the edge. Tech earnings revisions continue to gather momentum and a broadening out of AI beneficiaries is likely to drive an improved breadth of EPS revisions through course of 2024.
