JPM Outlook 2020 PDF

Eye on the Market Outlook 2020
J.P. MORGAN PRIVATE BANK
Ghosts of Christmas Past. After a very positive year for investors in 2019, we expect lower positive returns on financial assets in 2020
as some Ghosts of Christmas Past reappear. We don’t expect a global or US recession, and anticipate a modest growth and profits
rebound now that worst case trade outcomes may be avoided. Even so, high valuations, reduced effectiveness of monetary easing,
the repricing of unprofitable companies and rising corporate cost pressures will likely constrain the equity market’s advance. The two
big risks that could cause problems for investors: (a) a spike in inflation that forces the Fed to make a U-turn on policy rates, and (b) a
comprehensive progressive restructuring of the US economy after the 2020 election.
Our Ghosts of Christmas Past cover
This year’s cover depicts Ghosts from Christmas Past, all of whom have returned to either celebrate or bemoan
some notable trends for the year 2020:
Franklin D. Roosevelt, the most Richard Nixon, who bullied Federal Reserve Chair
progressive President of the 20th Arthur Burns in the early 1970s into lowering
century who once proposed a 100% policy rates through a series of trademark “dirty
income tax and whose reforms tricks” and false press reports, is enjoying the
shifted economic power from Wall sight of Donald Trump doing some of the same
Street to Washington, is celebrating to Fed Chair Jerome Powell. Policy rates net of
the even more progressive proposals inflation are once again around zero despite a
of Elizabeth Warren growing economy at full employment
Henry VIII, who in 1533 made England a sovereign, independent nation not subject to externally imposed laws
through The Act in Restraint of Appeals, is pleased about a possible Brexit. Henry is joined by Prime Minister
Margaret Thatcher. In our reincarnation, we depict the Margaret Thatcher that raised concerns about a European
superstate exercising dominance from Brussels, and who told biographer Charles Moore in her later years
that Britain should leave the EU. While Boris Johnson’s victory in December reduces some Brexit/referendum
uncertainty, Conservatives maintain they will not soften Brexit terms and will not seek an extension at the end of
2020; whether the EU agrees is another matter entirely
Mao Zedong, who ruled Communist Herbert Hoover sees his reflection in Trump, who
China from its establishment in 1949 also imposes tariffs on imported goods and deports
until his death in 1976, is delighted to immigrants. After the recent Phase I deal, tariffs
see Xi Jinping proclaimed “President for are still at the highest level in 40 years and could
Life” as China scraps the two-term limit rise again depending on Chinese compliance. On
it had imposed on presidents since the immigration, Hoover’s Administration launched
1980s. President Xi has cited Mao’s “long the “American Jobs for Real Americans” campaign
march” struggle against the Kuomintang and reimbursed state and local governments for
as precedent for China’s current strategic deportation measures. Hoover’s deportations
conflict with the US, which indicates a took place when unemployment was 15%–20%
limit to which China will compromise on compared to 3.5% today
mercantilist policies that it sees in its
own self-interest
Charlemagne’s reunited Western Roman The Pets.com Sock Puppet has become a
Empire stretched from the English metaphor for the dot.com era: In 1999, Pets.com
Channel to the Balkan Peninsula, but made $620K in revenue and had operating losses
disintegrated shortly after his death in of $20 million, since it was selling merchandise
814 A.D. in a series of civil wars. As a for roughly one-third of what it cost the company
force for a united Europe, Charlemagne to buy it. The puppet is wagging his tail, since
is unhappy to see the Eurozone project while we have not reached the excesses of the
floundering yet again with low growth, late 1990s, the share of US market capitalization
trillions in negative yielding government and corporate spending from young, unprofitable
debt, political fragmentation and limited companies is at its highest level since then. To
progress on Federalism bookend the Pets.com saga, SoftBank has now
abandoned its investment in the dog-walking app
Wag, which it had valued at over $600 million
INVESTMENT PRODUCTS ARE: • NOT FDIC INSURED • NOT A DEPOSIT OR OTHER OBLIGATION OF, OR GUARANTEED BY, JPMORGAN CHASE BANK,
N.A. OR ANY OF ITS AFFILIATES • SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED
MARY CALLAHAN ERDOES
J.P. Morgan Asset & Wealth Management
As we welcome a new year and a new decade, I want to thank you for the continued trust and
confidence
How doyouyou
place in J.P. Morgan.
summarize We
a year arewas
that indeed privileged
in many to serve
respects as your trusted
indefinable? advisor.
On one
hand, the European sovereign debt crisis, contracting housing markets and high
unemployment
For the weighed
past 17 years, my heavypartner
investment on all of our minds.
Michael But athas
Cembalest thethoughtfully
same time, shared
record
corporate profits and strong emerging markets growth left reason for optimism.
market insights to take into the coming year. It’s always an enlightening and entertaining read,
and this year isthan
So rather no different.
look back, we’d likeoftoChristmas
In “Ghosts Past,”
look ahead. Michael
Because and hisone
if there’s team discuss
thing that
their we’ve
expectations
learnedforfrom
another
the year
past of
fewglobal expansion,
years, but also
it’s that while wetake a close
can’t lookthe
predict at how Fed
future,
policywe can
and certainlyprogressive
a possible help you overhaul
prepare for it. U.S. economy could affect global growth and
of the
investment portfolios.
To help guide you in the coming year, our Chief Investment Oﬃcer Michael
Cembalest has spent the past several months working with our investment
As always, helping
leadership you better
across Assetposition your portfolios
Management worldwidefor the futurea iscomprehensive
to build our top priority.view
We hope
of thethis
you enjoy macroeconomic landscape.
piece and we wish you goodInhealth,
doinghappiness
so, we’ve and
uncovered
success some
in the potentially
coming year.
exciting investment opportunities, as well as some areas where we see reason to
proceed with caution.
Most sincerely,
Sharing these perspectives and opportunities is part of our deep commitment to
you and what we focus on each and every day. We are grateful for your continued
trust and confidence, and look forward to working with you in 2011.
Most sincerely,
EYE ON THE MARKET  M I C H A E L C E M B A LE ST  J.P. MORGAN 2020 Outlook
Ghosts of Christmas Past January 1, 2020

EYE
E Y E ON
O N THE
T H E MARKET
M A R K E T• MICHAEL
M I C H A E LCEMBALEST • J.P.
C E M B A LE ST MORGAN
 J.P . MORGAN 2020
2 0 2 0OUTLOOK
Outlook
E XECUTIVE
SUMMARY
Executive Summary
Ghosts of Christmas Past January 1, 2020
Now that worst case trade war outcomes look like they will be avoided1, we feel a bit better about the
global economic
Executive Summary outlook for 2020. Our best estimate is that tariffs and other trade sanctions reduced
2019 S&P 500 earnings growth potential by 7%-8%, and were the primary factors driving global growth
Now that worst case trade war outcomes look like they will be avoided1, we feel a bit better about the
from its 4.1% peak in early 2018 to 2.9% by Q3 2019. The charts below show the trade war impact not
global economic outlook for 2020. Our best estimate is that tariffs and other trade sanctions reduced
just on trade itself, but also on global manufacturing, corporate earnings, and capital spending.
2019 S&P 500 earnings growth potential by 7%-8%, and were the primary factors driving global growth
What’s
from its interesting
4.1% peakabout the2018
in early US-China
to 2.9%trade
by war: as shown
Q3 2019. The in the first
charts below chart,
show Europe and war
the trade Japan bore not
impact the
harsher
just bruntitself,
on trade of it, but
given their
also on greater reliance on exports
global manufacturing, and precarious
corporate earnings, growth trends
and capital in the first place.
spending.
While there wasn’t a GDP growth recession last year, there was an earnings recession in the US, Europe
What’s interesting about the US-China trade war: as shown in the first chart, Europe and Japan bore the
and Japan. While we expect earnings to rebound in 2020, that’s priced into most equity markets.
harsher brunt of it, given their greater reliance on exports and precarious growth trends in the first place.
While
Regionalthere wasn’t a GDP
manufacturing growth
business recession last year, there
surveys wasand
Global earnings
an US recession
corporate in the US, Europe
earnings
50+
and = expansion
Japan. While we expect earnings to rebound in y/y
2020, %, quarterly
that’s priced earnings
into mostgrowth excluding
equity buybacks
markets.
61
US 40%
Regional China
59 manufacturing business surveys Global and US corporate earnings
50+ = expansion
Eurozone y/y
30%%, quarterly earnings growth excluding buybacks
57
61
Japan
US 40%
55
59 20%
China
Eurozone 30%
53
57 10%
Japan US
51
55 20%
0%
49
53 10%
-10%
Global US
47
51 ex US
0%
45 -20%
49
2016 2017 2018 2019 2020 2012 2013 2014 2015 2016 2017 Global
2018 2019
-10%
47
Source: Markit PMI. December 2019. ex US Dec 16 '19.
Source: Factset, Morgan Stanley. MSCI ACWI ex US & S&P500.
45 -20%
Global
2016 capital 2017
spending stuck 2018in neutral 2019 2020 Trade stagnating
2012 2013 after 50
2014 years2016
2015 of globalization
2017 2018 2019
q/q %, seasonally
Source: adjusted annual
Markit PMI. December 2019. rate 6m/6m
Source:%, seasonally
Factset, Morganadjusted
Stanley. annual rate ex US & S&P500. Dec 16 '19.
MSCI ACWI
15% 15%
HundredsHundreds
Global capital spending stuck in neutral Trade stagnating after 50 years of globalization
q/q %, seasonally adjusted annual rate 6m/6m %, seasonally adjusted annual rate
10%
15% 10%
15%
5% 5%
10% 10%
0% 0%
5% 5%
-5% -5%
0% 0%
2002 2004 2006 2008 2010 2012 2014 2016 2018 2002 2004 2006 2008 2010 2012 2014 2016 2018
Source: J.P. Morgan Global Economic Research. Q2 2019. Source: Netherlands Bureau for Economic Policy Analysis. October 2019.
-5% -5%
2002 2004 2006 2008 2010 2012 2014 2016 2018 2002 2004 2006 2008 2010 2012 2014 2016 2018
Source: J.P. Morgan Global Economic Research. Q2 2019. Source: Netherlands Bureau for Economic Policy Analysis. October 2019.
1
There’s still plenty of uncertainty about exactly what was agreed to and whether the two sides will agree on
enforcement provisions, creating risks that the Trade War reignites again in 2020. See footnote on page 7.
INVESTMENT PRODUCTS ARE: ● NOT FDIC INSURED ● NOT A DEPOSIT OR OTHER OBLIGATION OF,
1
There’s still plenty of uncertainty
OR GUARANTEED about exactly
BY, JPMORGAN what
CHASE wasN.A.
BANK, agreed to and
OR ANY whether
OF ITS the two
AFFILIATES sides will
● SUBJECT TOagree on
enforcement provisions, creating risks
INVESTMENT RISKS,that the TradePOSSIBLE
INCLUDING War reignites
LOSS OFagain
THEin 2020. See
PRINCIPAL footnote
AMOUNT on page 7.
INVESTED 1
INVESTMENT PRODUCTS ARE: ● NOT FDIC INSURED ● NOT A DEPOSIT OR OTHER OBLIGATION OF,
OR GUARANTEED BY, JPMORGAN CHASE BANK, N.A. OR ANY OF ITS AFFILIATES ● SUBJECT TO 1
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED 1
E Y E O N T H E M A R K E T  M I C H A E L C E M B A LE ST  J . P . M O R G A N 2020 Outlook
EYE
E Y E ON
O N THE
T H EMARKET
C E M B A LE ST  J . MORGAN
P. MORGAN 2020
2 0 2 0OUTLOOK
Outlook
E XECUTIVE
SUMMARY
We expect a modest growth and profits rebound in 2020 (outside of Japan2), in part due to a surge
in
Wecoordinated
expect a modestcentral growth
bank easing which rebound
and profits typically leads
in 2020to a(outside
manufacturing
of Japanboost
2 7-9 due
), in part months later.
to a surge
Emerging Market central banks are an important part of this process. EM inflation
in coordinated central bank easing which typically leads to a manufacturing boost 7-9 months later. has reached an all-time
low of 3.5%-4.0%
Emerging (downbanks
Market central from are
10% aninimportant
the late 1990’s
part of and 6% over EM
this process. the inflation
last decade), indicating
has reached anthat EM
all-time
central banks have more room to ease if necessary. A modest upturn in global new
low of 3.5%-4.0% (down from 10% in the late 1990’s and 6% over the last decade), indicating that EM orders combined with
acentral
decline in the
banks inventory
have more roomoverhang suggests
to ease improved
if necessary. growthupturn
A modest in 2020, and asnew
in global shown on the
orders prior page,
combined with
manufacturing surveys are already picking up in the US and China.
a decline in the inventory overhang suggests improved growth in 2020, and as shown on the prior page,
manufacturing
We expect 5%-7% surveys are already
earnings growth picking
in the up
US inin the
2020;USthis
andnumber
China. would be higher, but is dragged down
by
Wethe energy
expect sectorearnings
5%-7% and by problems
growth inatthe Boeing. We expect
US in 2020; roughlywould
this number the same earnings
be higher, butgrowth in Europe,
is dragged down
although we do not expect a substantial narrowing of the performance gap between
by the energy sector and by problems at Boeing. We expect roughly the same earnings growth in Europe, the two regions (see
page 13 for more on the remarkable outperformance of US equities vs developed markets).
although we do not expect a substantial narrowing of the performance gap between the two regions (see
page 13banks
Central for more on the
rate cuts leadremarkable outperformance of Rising
global manufacturing US equities vs developed
new orders markets).
and falling inventory overhang point to
50+ = expansion Central bank cuts, 8 month lead 2020 rebound, Business surveys, 50+ = expansion
Central banks rate cuts lead global manufacturing Rising new orders and falling inventory overhang point to
60 45 56 51.0
50+ = expansion
Global manufacturing Central bank cuts, 8 month lead
40 2020 rebound, Business surveys, 50+ = expansion
58 survey 35 Global
60 45 56
55 51.0
50.5
56 Global manufacturing 30
40 inventories
58 survey 25
35 Global
54 20 55
54 50.5
50.0
56 30 inventories
52 15
25
54 10
20 54
53 50.0
49.5
50 515
52 010 53 49.5
48 52 49.0
50 -5
5
46 -10
0 Global new
48 Net # of central banks whose 52
51 49.0
48.5
-15
-5 orders
44 last move was a rate cut or -20
-10 Global new
46 51
50 48.5
48.0
42 Net #have
who of central banks
negative whose
rates -25
-15 orders
44 last move was a rate cut or -30
-20
40 -35
-25 50
49 48.0
47.5
42 who have negative rates
'98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 -30 2013 2014 2015 2016 2017 2018 2019
40 -35 49 47.5
Source:
'98 Country
'00 '02Central
'04 Banks,
'06 Markit
'08 PMI,
'10 Bloomberg.
'12 '14 November
'16 '182019. Source:
2013 Markit
2014 PMI. November
2015 2019.
2016 2017 2018 2019
Source: Country Central Banks, Markit PMI, Bloomberg. November 2019. Source: Markit PMI. November 2019.
Global semiconductor sales recovering
3 month average, US$ billions
Global semiconductor sales recovering
$42
3 month average, US$ billions
$40
$42
$38
$40
$36
$38
$34
$36
$32
$34
$30
$32
$28
$30
$26
$28
2014 2015 2016 2017 2018 2019
$26
Source:
2014 Semiconductor
2015 Industry
2016 Association.
2017 October
2018 2019. 2019
Source: Semiconductor Industry Association. October 2019.
2
The positive turn in leading indicators does not extend to Japan given rising risks of recession. Japan’s economy
may
2
Theshrink byturn
positive 2.5% in Q4 2019,
in leading and does
indicators October retail sales
not extend fell bygiven
to Japan -7.1% y/y risks
rising afterofa recession.
sales tax hike. Theeconomy
Japan’s Tankan
manufacturing report fell to its lowest level in 6 ½ years, and service sector surveys are now falling
may shrink by 2.5% in Q4 2019, and October retail sales fell by -7.1% y/y after a sales tax hike. The Tankan as well.
manufacturing report fell to its lowest level in 6 ½ years, and service sector surveys are now falling as well. 2
2
2
EYE
E Y E ON
O N THE
T H E MARKET
P. MORGAN 2020
2 0 2 0OUTLOOK
Outlook
E XECUTIVE
SUMMARY
However, even after the US/China Phase I deal, trade and investment barriers remain:
However,
 The US evenDep’t after the US/China
of Commerce PhasetoI deal,
is preparing releasetrade and investment
its entity barriers
restriction list remain:export rules
and product
 that
The US involve
Dep’tlimits on export isofpreparing
of Commerce “emerging to and foundational
release its entity technologies”.
restriction list andThe product
scope ofexport
these rules
rules
will
thataffect
involve tech, industrials,
limits on exportagribusiness,
of “emerging etc,and
narrowing the range
foundational of permissible
technologies”. Thetrade
scope andofinvestment.
these rules
Bottom
will affectline: while
tech, industrials, trade flows etc,
US-Chinaagribusiness, maynarrowing
normalize,the bilateral
range foreign direct investment
of permissible might not
trade and investment.
Bottomisline:
 China whileup
ramping securitytrade
US-China flows may
regulations normalize, software
on hardware, bilateral foreign investment
directChina
and data. is also might not
increasing
domestic content requirements, and has passed a Cryptography Law
 China is ramping up security regulations on hardware, software and data. China is also increasingwhich reportedly bans virtual
private
domesticnetworks
content (all company email
requirements, and hasand data atransfer
passed will be required
Cryptography Law which to use Chinese
reportedly operated
bans virtual
communication
private networkssystems that are email
(all company fully open
and to China’s
data Cybersecurity
transfer Bureau)to use Chinese operated
will be required
 Acommunication
November Senate systems
report thatonareChina’s
fully open to China’s
“Thousand Cybersecurity
Talents Bureau)
Plan” detailed the resources it provides to
Chinese researchers
 A November Senate report studying in the US (and funded by US taxpayers)
on China’s “Thousand Talents Plan” detailed the who illicitly transfer
resources intellectual
it provides to
3
property back to China . These kinds of disclosures may create obstacles in future
Chinese researchers studying in the US (and funded by US taxpayers) who illicitly transfer intellectual negotiations, which
are already
property impacted
back to China by3. aThese
growing understanding
kinds of disclosuresofmay China’s
createextreme mercantilism
obstacles (last chart) which
in future negotiations,
are already impacted by a growing understanding of China’s
 Trump may still impose penalties on $110 billion of US auto/parts imports from Europeextreme mercantilism (last chart)
and Japan (even
though the deadline for imposing Section 232 tariffs has passed); the US
 Trump may still impose penalties on $110 billion of US auto/parts imports from Europe and Japan (even is pursuing a Section 301
investigation against France for digital taxes, and may do the same against
though the deadline for imposing Section 232 tariffs has passed); the US is pursuing a Section 301 Italy, Turkey and Austria
(see page 25);against
investigation and thereFrancemay for
be European retaliation
digital taxes, and may for do
US the
tariffs on imported
same European
against Italy, Turkeygoods (which
and Austria
the
(seeWTO
page approved as compensation
25); and there may be European for EU Airbus subsidies)
retaliation for US tariffs on imported European goods (which
the WTO approved as compensation
US tariff history and projections assuming no change infor EU Airbus subsidies)
Trade war impact on US import counterparties
US import demand from targeted foreign exporters Share of US imports, 6 month average
US tariff history and projections assuming no change in Trade war impact on US import counterparties
Effective tariff rate (tariffs collected as % of all imported goods) 25%
US import demand from targeted foreign exporters Share of US imports, 6 month average China
tariff rate (tariffsWorst
Effective Smoot
20% case (all
collected as China imports
% of all + Eur/Jpn
imported autos)
goods) 25%
Hawley Actual tariffs imposed as of Nov 2019 20% China
Worst case (all China imports + Eur/Jpn autos)
20% Smoot After Phase I minor tariff reduction in Dec 2019
15% Hawley Actual tariffs imposed as of Nov 2019 20%
15%
Mexico
After Phase I minor tariff reduction in Dec 2019
15%
10% 15%
Mexico
10%
Canada
10%
5% 10%
Canada
Japan
5%
5% Korea
Japan
0% 5%
1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 0% Korea
Vietnam
0%
Source: Esteban Ortiz-Ospina and Max Roser "International Trade", US 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 0% Vietnam
International Trade Commission, USITC, US Census, JPMAM. Nov 2019. Source: US Census Bureau. October 2019.
Source: Esteban Ortiz-Ospina and Max Roser "International Trade", US 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
International Trade Commission, USITC, US Census, JPMAM. Nov 2019. Source: US Census Bureau. October 2019.
Decline in bilateral foreign direct investment may be Points of dispute in the US-China trade war
permanent, US$ billions China's score vs the rest of the world, 100 = best, 0 = worst
Decline in bilateral foreign direct investment may be Points of dispute in the US-China trade war
$50
permanent, US$ billions China's score vs the restPublic
of theownership of the
world, 100 = private
best, 0sector
= worst
Thousands
$45
$50 Chinese FDI into US Protection of trade secrets
Public ownership and data
of the private sector
Thousands
$40
$45 US FDI into
$35 Chinese FDIChina
into US IP Enforcement
Protection of (civil/crim penalties,
trade secrets and datatransparency, fines)
$40
$30 US FDI into China Extent of pirated software
IP Enforcement (civil/crim penalties, transparency, fines)
$35
$25 Barriers
Extent oftopirated
marketsoftware
access and forced technology transfer
$30
$20 Copyright protections,
Barriers to injunctive
market access relief, technology
and forced anti-piracy rules
transfer
$25
$15
$20 Receptivity
Copyrightto protections,
Foreign Direct Investment
injunctive relief, anti-piracy rules
$10
$15 Mercantilism Index (forced
Receptivity tolocal production
Foreign in exchange for market access,
Direct Investment
$5 export subsidies, IP theft, favoritism of domestic companies, FX manipulation)
$10
$0 Mercantilism Index (forced local production in exchange for market access,
$5 export subsidies, IP theft, favoritism of domestic companies, FX manipulation)
'04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 0 20 40 60 80 100
$0 Sources: OECD, BSA, GIPC, ITIF, Fraser Institute, JPMAM. 2019.
Source:
'04Rhodium
'05 '06Group. 2019
'07 '08 '09data
'10 is'11
YTD
'12through Q2.'15 '16 '17 '18 '19
'13 '14 0 20 40 60 80 100
Source: Rhodium Group. 2019 data is YTD through Q2. Sources: OECD, BSA, GIPC, ITIF, Fraser Institute, JPMAM. 2019.
3
“Threats to the U.S. Research Enterprise: China’s Talent Recruitment Plans”, US Senate Subcommittee, November
2019.
3 Examples
“Threats to theinclude a US Dep’t
U.S. Research of Energy
Enterprise: funded
China’s researcher
Talent that removed
Recruitment Plans”, 30,000 electronic
US Senate files from November
Subcommittee, a national
lab
2019. Examples include a US Dep’t of Energy funded researcher that removed 30,000 electronic files from ainnational
before leaving for China. Others took intellectual property and patent information to file similar patents China.
lab before leaving for China. Others took intellectual property and patent information to file similar patents in China. 3
3
3
EYE
E Y E ON
O N THE
T H E MARKET
P. MORGAN 2020
2 0 2 0OUTLOOK
Outlook
E XECUTIVE
SUMMARY
Part of our optimism for 2020 is based on the continued strength of the US consumer. US
consumption is close to its highest share of global GDP since 2008 and consumers are still optimistic, in
contrast to US CEOs. Part of the reason: while manufacturing is treading water, service sectors that make
up a larger share of the economy are doing better. As shown on pages 9-10, most measures of US wages,
labor markets, household debt, consumer delinquencies and housing look pretty healthy.
Consumer optimistic, CEOs retrenching Services holding up better than manufacturing
Index, 1985 = 100, 3m moving avg 50+ = positive outlook 50 += expansion
145 80 60
130 US consumer Service sector index
70 58
confidence
115
60 56
100
85 50 54
70
40 52
US CEO
55
confidence 50
30
40
Manufacturing index
25 20 48
'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Source: Conference Board. November 2019. Source: Markit PMI, ISM PMI. November 2019.
It’s clear from the data why Trump is looking for a way out of the trade war. US manufacturing
employment growth weakened since the trade war began, and now service sector employment most
exposed to manufacturing is slowing as well. With US growth temporarily boosted by unsustainable fiscal
stimulus (i.e., largest budget deficit on record at a time of full employment), the Administration’s trade war
is arguably undercutting its own growth strategy fueled by tax cuts and deregulation.
Private employment growth by manufacturing exposure Falling trucking employment: economic consequences,
y/y % and possibly political ones as well, 6 month change, %
4.0% 2.0%
Service sectors MOST exposed to manufacturing
Hundreds
3.5% Service sectors LEAST exposed to manufacturing

1.5%
3.0% Manufacturing
2.5% 1.0%
2.0%
0.5%
1.5%
1.0% 0.0%
0.5%
-0.5%
0.0%
-0.5% -1.0%
2011 2012 2013 2014 2015 2016 2017 2018 2019 2014 2015 2016 2017 2018 2019
Source: J.P. Morgan Economic Research. November 2019. Source: Bureau of Labor Statistics. November 2019.
Rising farm loan delinquency rates: small economic US unemployment rate and budget deficit decoupling
consequences, possibly larger political ones, y/y % % of GDP
4.0% 11% 12%
Related data: 2019 rise in farm bankruptcies
Hundreds
Hundreds
Midwest +12% 10% 10%

3.5% Southwest +15% 9%
Budget deficit 8%
Mid-Atlantic +15%
3.0% 8% 6%
7% 4%
2.5% 6% 2%
5% 0%
2.0%
4% -2%
Lowest unemployment
1.5% 3% rate in 40 years -4%
2% -6%
1.0% '60 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10 '15 '20
1994 1997 2000 2003 2006 2009 2012 2015 2018
Source: Bureau of Labor Statistics, US Treasury, J.P. Morgan Global
Source: Federal Reserve, US Farm Bureau. Q3 2019. Economic Research. Q3 2019. Dots are 2020 estimates.
4
4
EYE
E Y E ON
O N THE
T H E MARKET
P. MORGAN 2020
2 0 2 0OUTLOOK
Outlook
E XECUTIVE
SUMMARY
Another headwind for 2020: valuations are high, and we are starting to see cracks in risky and
poorly underwritten investments. Valuations have been on the high side for a while given easy central
bank money, but there are signs that investors are starting to be more discerning about risk and cash flow
fundamentals. Example #1: energy. Credit spreads for energy companies are widening even as overall
high yield spreads don’t. Furthermore, after a decade of energy sector underperformance vs the overall
market, there has been a collapse in energy-related debt and equity issuance.
US high yield spreads E&P sector relative performance and issuance
Spread to worst S&P 500 E&P energy sector - S&P 500 total return US$, billions
0% $90
E&P energy sector equity
Hundreds
1,800
-50% and HY bond issuance $80
1,500 $70
-100%
1,200 $60
-150%
S&P E&P energy sector $50
900 -200% performance vs market
$40
Energy
600 -250% $30
Ex-Energy
300 -300% $20
2014 2015 2016 2018 2019 2008 2010 2012 2014 2016 2018
Source: Bloomberg, JPM HY Strategy team. December 11, 2019. Source: Bloomberg. November 2019. Issuance data for 2019 annualized.
There has also been a spike in “weakest link” companies, which refers to companies rated B- or worse
with negative outlooks (below, left). And as most investors are aware, some 2019 tech IPOs have been
poor performers. However, as we discuss on page 26, this is mostly the case with IPOs of companies
claiming to be technology firms but which lack some of their critical attributes.
A spike in weakest link companies Real tech IPOs are doing just fine
Number of issuers rated B- or lower with negative outlooks or ratings Performance relative to IPO price
on CreditWatch with negative implications 120%
300 Pure tech
+201%
+192%
+191%
+154%
100%
Hardware
80%
250 Marketplace companies

60% Hardware/software

200 40% Social media

20%

150

0%
Fiverr
Sonos
Lyft
Upwork
Zscaler
Zoom
Cloudflare
Anaplan
Uber
Docusign
SurveyMonkey
Zuora
Smartsheet
Medallia
Datadog
Spotify
Pivotal
Pinterest
CrowdStrike
Carbon Black
Fastly
EverQuote
Eventbrite
Arlo
Dynatrace
Health Catalyst
Tenable
Peloton
PagerDuty
Livongo
Slack
Dropbox
-20%
100
-40%
50 -60%
Sep-06 Sep-08 Sep-10 Sep-12 Sep-14 Sep-16 Sep-18 -80%

Source: S&P Global Ratings Research. November 18, 2019. Source: J.P. Morgan Asset Management, Bloomberg. December 30, 2019.
US equity valuation measures: high vs history. As shown in the table on the next page, most valuation
measures are around the 90th percentile of historical expensiveness. These measures crept up during 2019,
since the double-digit equity rally in 2019 was based almost entirely on multiple expansion, in contrast
to the 2009-2018 period when the US equity rally was driven primarily by earnings growth. While we
expect profits to rise modestly in 2020, gains may be limited due to rising labor, interest, depreciation and
SG&A costs, all of which are trending higher relative to revenues.
5
5
EYE 2020 OUTLOOK
E Y E ON
O N THE
T H E MARKET
C E M B A LE ST  J.PMORGAN
. MORGAN 2020 Outlook
E XECUTIVE
Some research I see focuses on free cash flow yields, but the apparent cheapness of this measure is due to
SUMMARY
a sharp
Some decline
research in capital
I see focusesspending intensity
on free cash of USbut
flow yields, companies sincecheapness
the apparent 2008. If you were
of this to measure
measure is duefree
to
cash flow yield only since 2009, it looks just as expensive as the other measures.
a sharp decline in capital spending intensity of US companies since 2008. If you were to measure free
cash flow yield only since 2009, it looks just as expensive as the other measures.
Historical Capital spending as % of cash flow from operations, US
S&P 500 valuation metric Current
percentile S&P 500 ex financials
Historical Capital spending as % of cash flow from operations, US
S&P 500 valuation
US market metric
cap / GDP Current
199% 99th 90% 500 ex financials
percentile S&P
Enterprise value / Sales 2.5x 99th
US market cap / GDP 199% 99th 90%
80%
Enterprise value / EBITDA
Enterprise value / Sales
12.7x
2.5x
93rd
99th Average 1990-2002: 69%
Price / Book 3.6x 90th 80%
70%
Enterprise value / EBITDA 12.7x 93rd Average 1990-2002: 69%
Cyclically adjusted P/E 27.8x 89th
Price / Book 3.6x 90th 70%
60%
Forward P/E 18.4x 88th
Cyclically adjusted P/E 27.8x 89th
Cash flow yield 7.2% 85th 60%
50%
Forward P/E 18.4x 88th
Free cash flow yield 4.1% 53rd 50%
Cash flow yield 7.2% 85th 40%
S&P earnings yield - 10Y UST 362 bps 28th Average 2003-2019: 46%
Free cash flow yield 4.1% 53rd
40%
30%
Median metric 89th
S&P earnings yield - 10Y UST 362 bps 28th 1990 1993 1996 1999 2002 2005Average 2003-2019:
2008 2011 46% 2020
2014 2017
Source: Goldman Sachs Investment Research. EBITDA = earnings before 30%
Median metric 89th
interest, tax, depreciation, and amortization. December 16, 2019. Source:
1990Goldman Sachs1999
1993 1996 Investment
2002 Research.
2005 2008November 2019. 2017 2020
2011 2014
Source: Goldman Sachs Investment Research. EBITDA = earnings before
Here’s another measure worth watching which we discuss Source: in
interest, tax, depreciation, and amortization. December 16, 2019. Goldman
moreSachs Investment
detail on pageResearch.
26. November
There’s2019.
a growing
number of firms we refer to as “YUCs”: Young Unprofitable Companies, which
Here’s another measure worth watching which we discuss in more detail on page 26. There’s a growing have negative net
income, rapid sales growth and which have been around
number of firms we refer to as “YUCs”: Young Unprofitable for less than 5 years. I don’t think we
Companies, which have negative net will ever
re-live the
income, lunacy
rapid that
sales took place
growth at the end
and which haveofbeen
the 1990’s 4
around, for
butless
as shown
than 5below,
years. some measures
I don’t arewill
think we getting
ever
there. The portion of US market capitalization made up4 of YUCs is around a third of the 2000 peak, and
re-live the lunacy that took place at the end of the 1990’s , but as shown below, some measures are getting
the YUCThe
there. share of total
portion corporate
of US marketspending on SG&A,
capitalization madecapital spending
up of YUCs and R&D
is around is even
a third higher.
of the 2000Ifpeak,
investors
and
tire of financing the YUCs, consequences for growth and large cap tech profits could be
the YUC share of total corporate spending on SG&A, capital spending and R&D is even higher. If investors material.
tire of financing
Nevertheless, thethe YUCs,
slow consequences
pace of net US equityfor growth
supply andshould
large cap tech profits
mitigate the could be material.
duration and downside
of the next selloff, whether it takes place with or without a US recession.
Nevertheless, the slow pace of net US equity supply should mitigate the duration and As a reminder, after the 20%
downside
of the next selloff, whether it takes place with or without a US recession. As a reminder, after therecord
selloff that took place in December 2018, the S&P 500 staged its fastest bear-market recovery on 20%
over the
selloff subsequent
that took place100 days. As we
in December 2018,discussed
the S&Plast November,
500 staged itsthe magnitude
fastest of therecovery
bear-market next selloff would
on record
have the
over to be 35%-45%100
subsequent in order
days. toAsvalidate the virallast
we discussed bearish predictions
November, of the Armageddonists.
the magnitude of the next selloff would
have
YoungtoUnprofitable
be 35%-45% in order to validate the viral bearish
Companies predictions oflow
Unprecedented Armageddonists.
thelevels of net US equity supply
% of total market cap and corporate spending US$ billions, based on MSCI All Country World Equity Index
Young Unprofitable Companies
7% Unprecedented low levels of net US equity supply
$1,400
% of total market cap and corporate spending US$ billions, based on MSCI All Country World Equity Index
Market capitalization Corporate spending $1,200 Non - US US Total
6%
7% $1,400
Young unprofitable company: $1,000
Market capitalization Corporate spending
Negative net income in 2 of last 3 yrs $1,200 Non - US US Total
5%
6% $800
Less unprofitable
Young than 5 yearscompany:
since IPO $1,000
Annual revenues
Negative growing
net income > last
in 2 of 15%3 yrs $600
4%
5% $800
Less than 5 years since IPO $400
3% Annual revenues growing > 15% $600
4% $200
$400
2% $0
3% $200
-$200
1%
2% $0
-$400
-$200
0%
1% -$600
-$400
'99
'05
'00
'01
'02
'03
'04
'06
'07
'08
'09
'10
'11
'12
'13
'14
'15
'16
'17
'18
'19
1990 1995 2000 2005 2010 2015

0% -$600
Source: Factset, J.P. Morgan Asset Management. Q3 2019. Source: JPM Global Markets Strategy Flows & Liquidity Report. Nov 2019.
'99
'05
'00
'01
'02
'03
'04
'06
'07
'08
'09
'10
'11
'12
'13
'14
'15
'16
'17
'18
'19
1990 1995 2000 2005 2010 2015

Source: Factset, J.P. Morgan Asset Management. Q3 2019. Source: JPM Global Markets Strategy Flows & Liquidity Report. Nov 2019.
4
At the end of the 1990’s, the two CEOs of TheGlobe.Com were invited to speak at J.P. Morgan’s internal Managing
Director meeting, the first one I was invited to. I checked my Bloomberg terminal to see what the company did, and
4
At the end of the 1990’s, the two CEOs of TheGlobe.Com were invited to speak at J.P. Morgan’s internal Managing
it said “TheGlobe.Com has no publicly announced business model at this time”. I asked around and no one
Director meeting, the first one I was invited to. I checked my Bloomberg terminal to see what the company did, and
else had any idea what they did either. Their stock disintegrated over the next few months.
it said “TheGlobe.Com has no publicly announced business model at this time”. I asked around and no one
else had any idea what they did either. Their stock disintegrated over the next few months. 6
6
6
EYE
E Y E ON
O N THE
T H E MARKET
M A R K E T•5 MICHAEL
P. MORGAN 2020
2 0 2 0OUTLOOK
Outlook
E XECUTIVE
The big risks for 2020 . Based on what we’ve discussed so far, we believe that 2020 should offer investors
SUMMARY
another
The big year
risksof global
for 2020expansion
5
. Based onand 7%-10%
what returns insoequity
we’ve discussed far, wemarkets. But2020
believe that like Odysseus crossing
should offer the
investors
Strait of Messina, investors in 2020 face two substantial risks. In Homer’s Odyssey, Odysseus had
another year of global expansion and 7%-10% returns in equity markets. But like Odysseus crossing the to survive
both
StraitaofSea Monster
Messina, (Scylla)inand
investors a giant
2020 face whirlpool (Charybdis):
two substantial risks. In Homer’s Odyssey, Odysseus had to survive
both a Sea Monster (Scylla) and a giant whirlpool (Charybdis):
For investors, one 2020 peril is a pickup in US wage or price inflation that indicates that the Fed has made
aFor
serious mistake
investors, one in cutting
2020 perilreal
is arates
pickupto in
zero
US (again).
wage or ThepriceFed’s thinking
inflation that on policy rates
indicates hasFed
that the undergone
has made a
massive shift since 2007, with current estimates of the natural real rate of interest at
a serious mistake in cutting real rates to zero (again). The Fed’s thinking on policy rates has undergone a less than 1% (actual
real policy
massive rates
shift are2007,
since even below this level).
with current The other
estimates of theperil: a progressive
natural overhaul
real rate of interestofatthe
lessUS economy
than after
1% (actual
the
real election (bans
policy rates areon stock
even buybacks,
below increased
this level). corporate
The other peril: tax rates, sector-level
a progressive overhaulcollective
of the USbargaining, etc;
economy after
see pages 22-24). The 2nd
chart is one way to illustrate the breadth of the 2020 progressive
the election (bans on stock buybacks, increased corporate tax rates, sector-level collective bargaining, etc; agenda:
Warren’s
see pagestax increaseThe
22-24). proposals
2nd chartareisroughly
one way 2.5to
times the level
illustrate theofbreadth
FDR’s tax
ofincreases
the 2020that took placeagenda:
progressive during
the Great Depression, a time when US unemployment reached 22%.
Warren’s tax increase proposals are roughly 2.5 times the level of FDR’s tax increases that took place during
the Great Depression,
A radical a time
change in Fed when
thinking USreal
about unemployment
policy rates reached 22%.
Progressive tax increases
Estimated natural real interest rate (R-star) Annual Federal tax receipts, % of GDP
A radical change in Fed thinking about real policy rates Progressive tax increases
4.0% 25%
Estimated natural real interest rate (R-star) Annual Federal tax receipts, % of GDP
Hundreds
3.5%
4.0% 25%
20% by 2029
Hundreds
3.0%
3.5%
20%
15% by 2029
2.5%
3.0%
2.0% 15%
10%
2.5%
in 2020
1.5%
2.0% 10%
5% by 1939
in 2020
1.0%
1.5% in 1932
5%
0% by 1939
0.5%
1.0% inFDR
1932 Warren
Current real Fed Funds rate 0% Revenue and Social Security Various proposals (excl.
0.0%
0.5% Acts of 1934, FDR
1935, 1936, 1938 EmployerWarren
Medicare taxes)
1980 1985 1991
Current1996
real Fed2002 2007
Funds rate 2013 2018
Revenue and Social Security Various proposals (excl.
0.0%
Source: Laubach-Williams, Federal Reserve Bank of NY. Q3 2019. Acts of 1934,
Sources: JPMAM, FRB 1935, 1936,NTU,
(St Louis), 1938CRFB,
Employer Medicare taxes)
CBO. 2019.
1980 1985 1991 1996 2002 2007 2013 2018
Source: Laubach-Williams, Federal Reserve Bank of NY. Q3 2019. Sources: JPMAM, FRB (St Louis), NTU, CRFB, CBO. 2019.
5
Of course, a third big risk is that the Trade War reignites again. US Trade Rep Robert Lighthizer and Vice
Premier Liu He are expected to sign the Phase I trade agreement in early January. After that, we would not expect
5
Of course, a third big risk is that the Trade War reignites again. US Trade Rep Robert Lighthizer and Vice
any more tariffs on China, and do not expect material tariffs or penalties on US auto/parts imports from Europe and
Premier Liu He are expected to sign the Phase I trade agreement in early January. After that, we would not expect
Japan. However, some observers doubt that Chinese agricultural imports from the US will reach the $50 bn measure
any more tariffs on China, and do not expect material tariffs or penalties on US auto/parts imports from Europe and
Trump cited (which is 2x the 2017 level). Furthermore, while Chinese officials confirmed the existence of a deal at a
Japan. However, some observers doubt that Chinese agricultural imports from the US will reach the $50 bn measure
December press conference, they were not precise about commitments on agriculture purchases, market opening or
Trump cited (which is 2x the 2017 level). Furthermore, while Chinese officials confirmed the existence of a deal at a
structural reforms, emphasizing that the text still needed to be legally scrubbed and translated into Chinese. The
December press conference, they were not precise about commitments on agriculture purchases, market opening or
tentativeness of the Phase I agreement is reinforced by how small Trump’s tariff reduction was (see chart page 3).
structural reforms, emphasizing that the text still needed to be legally scrubbed and translated into Chinese. The
tentativeness of the Phase I agreement is reinforced by how small Trump’s tariff reduction was (see chart page 3). 7
7
7
E YE ON T HE M A RK ET l M I CH AE L CE MB A LE ST l J . P. MO R G A N 2020 O u t l o o k
2020
EYE
E Y E ON
O N THE
T H EMARKET
P. MORGAN 2 0 2 0OUTLOOK
Outlook
E XECUTIVE
Assessing the big risks. On a US inflation surprise, we believe this is unlikely for the reasons discussed
SUMMARY
Assessing
on the big risks.
pages 17-18. forOn
Asrisks. a US inflationoverhaul
a progressive surprise,ofwethe
believe
US this is unlikely for the reasonson discussed on pages
Assessing the big On a US inflation surprise, weeconomy,
believe this that will depend
is unlikely for the the US electorate,
reasons discussed
17-18.
and As
whether for a progressive
unorthodoxies overhaul of
and misdeeds the US economy,
of the that
President will depend
(chronicled on the US electorate, and whether
on pages 17-18. As for a progressive overhaul of the US economy, thatinwill
great detailonelsewhere)
depend offset a
the US electorate,
unorthodoxies
pretty strong andeconomy.
US misdeeds The
of the President
first chart (chronicled
below shows inhow
greatcurrent
detail elsewhere)
conditions 6offset a pretty
compare strong for
favorably US
and whether unorthodoxies and misdeeds of the President 6(chronicled in great detail elsewhere) offset a
economy.
Trump The first
as an incumbent chart below shows
compared how current conditions compare favorably for Trump as an incumbent
pretty strong US economy. The firsttochart
history.
below However,
shows how that didn’t
currenthelp Republicans
conditions 6 muchfavorably
compare in the 2018for
compared
midterm to history. However, that didn’t help Republicans much in the 2018
Trump as an incumbent compared to history. However, that didn’t help Republicans much in economic
elections, when the GOP lost 40 seats; that’s a very large number midterm
given how elections,
positive when
the the
2018
GOP
and lost 40
market
midterm seats;
elections, that’s
conditions when a the
very
were large
atGOP number
the lost
time. given
40There
seats; how
are positive
clearly
that’s a veryothereconomic
factors
large numberand given
market
driving thehowconditions
electorate were
right
positive at the
now.
economic
time. There are clearly other factors driving the electorate right now.
and market conditions were at the time. There are clearly other factors driving the electorate right now.
2020: strongest election tailwinds since 1896 GOP lost a large number of House seats in 2018 midterms
Market/economic score (see footnote) despite
GOP strong market and economic conditions
2020:
2020: strongest
strongest election
election tailwinds
tailwinds since
since 1896
1896 GOP0lost
lost aa large
large number
number of
of House
House seats
seats in
in 2018
2018 midterms
midterms
0.80
Market/economic score (see footnote) despite strong market and economic conditions
Party
Market/economic score (see footnote) 1962
despite strong market and economic conditions
1986
Incumbent runs -10 1990
0.80
0.70
? 0 1970 1926 2014
Party
0.80 0 1962 1986
Party
No incumbent
Incumbent runs W W 1990 1962
1978 1954
1986
-20
-10
by President's
0.70 Incumbent runs ? -10 1990 1918 1970 1926 2014
0.60
0.70 No incumbent ? 1982 1970 1950 1926 2014
W W 1978 1954
No incumbent W W -30
-20 2006
President's
W W 19181978 1954
-20
byPresident's
0.60
0.50 L W 1918
0.60 -40 1982 1950
W W WW W -30 1982 1950 2018
2006
0.50 L W W W W -30 1942 2006
0.40
0.50 W L L W -50 1974 1958 1966
W W W
W W -40 1930 2018
WW W
W W LW W -40 1942 1994 1958 19461966 2018
0.40
0.30 L W -60
-50 1974 1942
0.40 W W W 1910 1974 1914 1966
W W W L -50 1930 1994 19581946
lost
0.30 W W LW 1930
2010 1994 1946
0.20 LW -70
-60
lostby
0.30 L -60 1910 1914 1938
1910 1914
W 20101922
Seats
lost
0.20
0.10 W -80
-70 2010
0.20 L L -70 1938
L 1922 1938
Seats
0.10
0.00 -90
-80 1922
Seats
0.10 L -80
L 0.20 0.30 0.40 0.50 0.60 0.70 0.80 0.90
19121912
19841984
18961896
19041904
19201920
19281928
19361936
19441944
19521952
19601960
19681968
19761976
19921992
20002000
20082008
20162016
0.00 -90
0.00 -90
0.20 0.30 Market/economic
0.40 0.50 score
0.60 (see0.70
footnote)
0.80 0.90
0.20 0.30 0.40 0.50 0.60 0.70 0.80 0.90
1912
1984
1896
1904
1920
1928
1936
1944
1952
1960
1968
1976
1992
2000
2008
2016
Sources: J.P. Morgan Asset Management. 2019. Source: J.P. Morgan Asset Management. 2019.
Market/economic score Red=GOP, Blue = Dem.
(see footnote)
Market/economic score (see footnote)
Sources: J.P. Morgan Asset Management. 2019. Source: J.P. Morgan Asset Management. 2019. Red=GOP, Blue = Dem.
Sources: J.P. Morgan Asset Management. 2019. Source: J.P. Morgan Asset Management. 2019. Red=GOP, Blue = Dem.
In the remainder of the Outlook, we answer 10 questions we’ve been receiving from clients as
In
In the
we remainder
head
the of of
into 2020.
remainder thethe
Outlook, we answer
Outlook, 10 questions
we answer we’ve been
10 questions receiving
we’ve been from clientsfrom
receiving as weclients
head into
as
2020.
we Why
1. headdon’t
into I2020.
think there will be a US recession in 2020?
1.
1.
2. Why
Why don’t
What don’t I Ithink
are the thinkthere will
willbe
thererisks
greatest beainvestors
to US recession
a US recessionin 2020?
in markets
in credit 2020? when the next recession occurs?
2.
2.
3. What
Why are
Whatdo the
areUSthe greatest
greatest
equity risks
riskstokeep
markets toinvestors inin
investors credit markets
credit
outperforming when
markets
Europe thethe
when
and next
Japan? recession
next occurs?
recession occurs?
3.
4. Why do
3. How do US
USequity
equity
is China markets
doingmarkets keep
ofoutperforming
keep
at a time conflict,Europe
outperforming
trade andand
Europe
and what Japan?
areJapan?
implications for EM investors?
4. How
How isisChina
4. Why
5. China
US doing
doingatdead?
inflation a time
at of of
a time trade conflict,
trade andand
conflict, what are implications
what for EM
are implications forinvestors?
EM investors?
5. Why isisare
5. What
6. US inflation
inflationdead?
USnegative dead? rates doing to European banks?
interest
6. Will
6.
7. Whatvalue
What arenegative
are negative interest
interest
stocks ever ratesdoing
stoprates doingtoto European
European
underperforming banks?
banks?
growth?
7. What
7.
8. Will value
Will value stocks
stocks
are the everstop
ever
greatest stop underperforming
risksunderperforming agrowth?
to markets fromgrowth?
possible progressive overhaul of the US economy?
8. What
8.
9. What are
aregoing
is thegreatest
the greatest
on in US risks
IPOtoto
risks marketsfrom
markets
markets? from a possible
a possible progressive
progressive overhaul
overhaul of the
of the US economy?
US economy?
9. What
9.
10. What is
is going
is going
the onininteresting
on
most inUSUSIPOIPO markets?
markets?
breakthrough I learned about in 2019?
10.
10. What isis the
themost
WhatCembalest mostinteresting
interestingbreakthrough
breakthrough I learned
I learned about
about in 2019?
in 2019?
Michael
J.P. Morgan
Michael Asset Management
Cembalest
Michael Cembalest
J.P. Morgan
J.P. MorganAsset AssetManagement
Management
6
Our US market and economic conditions score incorporates consumer price inflation, producer price inflation,
6
Our US market
unemployment
6
andchange
level, economic conditions score
in unemployment, US incorporates
per capita GDPconsumer price equity
vs the G10, inflation, producer
market price inflation,
returns/volatility and
Our US market
unemployment and economic
level, change conditions
in unemployment, score incorporates
US peroncapita GDP consumer
vs the G10, price
equity inflation,
market producer price inflation,
returns/volatility and home
home price
unemployment appreciation.
level, They
change were selected
in unemployment, based their availability
US availability
per capita since
GDP the since
vs the the late 1800’s.
price appreciation. They were selected based on their lateG10, equity market returns/volatility and
1800’s.
home price appreciation. They were selected based on their availability since the late 1800’s. 8
8 8
8
EYE
E Y E ON
O N THE
T H E MARKET
P. MORGAN 2020
2 0 2 0OUTLOOK
Outlook
[1] Why don’t I think there will be a US recession in 2020?

Most recessions occur due to Fed tightening in response to rising wage/price inflation, or due to a shock
to financial conditions (debt/banking crisis, oil shock, global trade war, etc). On inflation, conditions
outlined on pages 17-18 are likely to keep Fed tightening at bay for another year. After adjusting for
U S 2020
structural changes in the US economy, the latest recession models now include business surveys like the
PMI/ISM, core inflation, the shape of the yield curve out to 18 months, credit spreads and the private sector
financial balance. Using this approach, US recession probabilities out 12-24 months are ~25%.
On systemic shocks, the trade war dented CEO confidence, and 67% of respondents to the September
2019 Duke CFO survey believe the US will be in recession by the end of 2020. However, the strength of
US consumer balance sheets (lowest debt service obligations in 40 years) and in US labor markets (lowest
unemployment in 50 years) offsets some weakness in manufacturing. While labor conditions are lagging
indicators, the degree of strength suggests enough resilience to avoid recession due to the aftershocks of
the trade war. So far, US consumers bore the primary costs of tariffs; however, a shift to domestically-
produced US goods, lower US importer profits, lower Chinese exporter profits and a declining Chinese
exchange rate absorbed part of the cost as well. The complete halt in Boeing 737 Max production could
reduce US growth in the first quarter of next year by 0.3%-0.4%; a rebound would of course boost growth
by the same amount, but it is unclear when/if that will happen.
CEO business confidence plummeting Lowest household debt service to income obligations in
50+ = positive outlook 40 years, % of disposable income
80
19%
Hundreds
18%
70 17%
16%
60
15% Financial obligations ratio
50 14%
(mortgage, consumer, auto, rent, homeowners'
insurance & property tax payments)
13%
40
12%
30 11%
10% Debt service ratio
20 (mortgage & consumer debt payments)
9%
1976 1981 1986 1991 1996 2001 2006 2011 2016 '80 '83 '86 '89 '92 '95 '98 '01 '04 '07 '10 '13 '16 '19
Source: The Conference Board. Q3 2019. Grey bars indicate recessions. Source: US Federal Reserve. Q3 2019.
Lowest unemployment rate in 50 years Signs of a healthy US labor market

18% % of labor force, 3-month moving average
Hundreds
16% 2.5% 2.0%

Unemployed + part-time
Hundreds
Hundreds
14% employed + available (U6) Voluntary quit rate
2.3% 1.8%
12%
10% 2.0% 1.6%
8%
6% 1.8% 1.4%
4% Firing rate
Unemployed (U3) 1.5% 1.2%
2%
0%
1950 1954 1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009 2014 2018 1.3% 1.0%
2001 2003 2005 2007 2009 2011 2013 2015 2017 2019
Source: BLS. November 2019. "Available" indicates people who are not
working nor looking for a job but have looked for a job in the past 12 months. Source: Bureau of Labor Statistics. October 2019.
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Here’s another look at the strength of US consumers, who currently benefit from wage growth across
all quartiles of income and low levels of household debt service. As a result, we are not surprised to see
stable consumer spending and stability in the savings rate. Consumer delinquencies are stable, although
we are seeing evidence of early-stage weakness in both credit cards and in subprime auto. On housing,
most data look good, including a 20-year high in the NAHB Homebuilder Index in November.
U S 2020
Wages rising across all levels of income Household debt

12 month moving average of monthly median wage growth, % % of disposable income (both axes)
7% 140% 13.5%
Lowest income
Hundreds
130% 13.0%
6% 2nd quartile
3rd quartile 120% 12.5%
5% Highest income 110% 12.0%
4% 100% 11.5%
90% 11.0%
3%
80%
Debt 10.5%
Household
service
2% debt
70% 10.0%
1% 60% 9.5%
1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 1980 1984 1988 1992 1996 2000 2004 2008 2012 2016
Source: Federal Reserve Bank of Atlanta. November 2019. Source: Federal Reserve. Q3 2019.
Sharp upward revision in US savings rate Real consumer spending

Personal savings rate as % of disposable income, 3m moving avg Average monthly % change over 3 months, 2012 US$
11% 0.6%
Hundreds
10%
9% Post-revision
0.4%
8%
7%
0.2%
6%
5%
4% Pre-revision 0.0%
3%
2%
-0.2%
'90 '92 '94 '96 '98 '00 '02 '03 '05 '07 '09 '11 '13 '15 '17 '19
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Source: BEA. November 2019. Pre-revision data refers to May 2018 revision. Source: Bureau of Economic Analysis. November 2019.
US 90+ days loan delinquency transition rates Housing starts, mortgage applications, and existing home
6% 10% sales, Index Jan 2000 = 100, seasonally adjusted
First mortgage
Hundreds
175
5%
8% 150
Mortgage applications
4%
125
6%
Existing home sales
3% 100
Credit cards
4%
2% 75
Auto loans 2%
1% 50
Second mortgage Housing starts
25
0% 0% '00 '02 '04 '06 '08 '10 '12 '14 '16 '18
'05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 Source: US Census Bureau, Mortgage Bankers Association, National
Source: S&P Dow Jones Indices, Experian. November 2019. Association of Realtors. November 2019.
10
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[2] When the next US recession does occur, what are the biggest risks to investors in credit?
[2] When
At first the next
glance, creditUS recession
markets don’tdoes occur,
appear whatoutsized
to pose are the risks
biggest risks
to the US to investorsWhile
economy. in credit?
corporate
debt levels are high, corporate debt service levels are not (first chart). This is a reflection
At first glance, credit markets don’t appear to pose outsized risks to the US economy. While corporateof low interest
rates, low credit spreads and companies having termed out their debt maturities (e.g., low near-term
debt levels are high, corporate debt service levels are not (first chart). This is a reflection of low interest debt
maturities as a % of cash flow).
rates, low credit spreads and companies having termed out their debt maturities (e.g., low near-term debt
maturities as a % of cash flow).
S&P 500 median company debt service ratio and leverage Debt due in less than one year net of cash
Interest expense/operating income Net debt/operating income % of EBITDA
S&P
30% 500 median company debt service ratio and leverage3.0x Debt due in less than one year net of cash
Interest expense/operating income
LeverageNet debt/operating income % of EBITDA
25%
30% (Net debt 3.0x
Leverage 2.5x 25%
25% /operating income) 20%
MA RK E T S
(Net debt
CREDIT
2.5x
25% /operating income) 2.0x 20%
15%
20%
2.0x 15%
1.5x 10%
20%
15% Debt service ratio 1.5x 10%
(Interest expense / 1.0x 5%
15% Debt service
operating ratio
income)
(Interest expense / 1.0x
5%
10% 0%
0.5x
operating income)
1990 1994 1998 2002 2006 2010 2014 2018 1985 1990 1995 2000 2005 2010 2015
10% 0.5x 0%
Source:
1990 JPMAM,
1994Bloomberg.
1998 December
2002 30,
2006 2019.
2010 2014 2018 Source:
1985Bridgewater.
1990 May 2019. 2000
1995 2005 2010 2015
Source: JPMAM,
However, Bloomberg.
I do believeDecember
that the30, next
2019. recession will put pressure
Source: Bridgewater.
on leveragedMay 2019.
loans: that’s where investors
have been clustering at a time of low interest rates. As seen on the right
However, I do believe that the next recession will put pressure on leveraged loans: from our July 2019
that’s special
where issue
investors
Eye on the Market, there has been a sharp deterioration in leveraged loan covenant protections
have been clustering at a time of low interest rates. As seen on the right from our July 2019 special issue
7
.
Eye on thecrowding
Investors Market, into
there has been
leveraged a sharp deterioration Loan
loans in leveraged
investors loan covenant
waving protections
the white
7
.
flag: Moody's loan
% of GDP covenant quality score
Investors crowding into leveraged loans
11%
Loan investors
5.0 = weakest waving
covenant the white flag: Moody's loan
quality
% of GDP
10%
covenant
4.2 quality score
11% 5.0 = weakest covenant quality
9%
10% High yield bonds 4.2
4.0
8%
9%
7% High yield bonds 4.0
3.8
8%
6%
7% 3.8
5% 3.6
6%
4% Consumer loans
5% 3.6
3.4
3%
4% Consumer loans Leveraged loans
2% 3.4
3% 3.2
1% Leveraged loans
2%
0% 3.2
3.0
1% '90 '91 '93 '95 '97 '99 '01 '03 '05 '07 '09 '11 '13 '15 '17 '19
2012 2013 2014 2015 2016 2017 2018 2019
0% 3.0
Source: J.P. Morgan Global Research, BEA, FRB. Q3 2019. Source: Moody's. Q2 2019.
'90 '91 '93 '95 '97 '99 '01 '03 '05 '07 '09 '11 '13 '15 '17 '19 2012 2013 2014 2015 2016 2017 2018 2019
Source: J.P. Morgan Global Research, BEA, FRB. Q3 2019. Source: Moody's. Q2 2019.
There are other signs of stress once you look beyond the median company and focus on the
There areones.
weakest otherAssigns
shown
of atstress
the top of the
once you next page,
look aroundthe
beyond 40% of midcompany
median and small cap
andcompanies
focus on face
the
substantial restructuring risks despite low interest rates, and S&P now reports
weakest ones. As shown at the top of the next page, around 40% of mid and small cap companies a spike in “weak link”
face
companies. restructuring
substantial Low interest rates can forestall
risks despite low ainterest
recession for aand
rates, while,
S&Pand
nowthey certainly
reports help companies
a spike with
in “weak link”
debt service burdens. But when a recession hits, loan and bond prices are more influenced by
companies. Low interest rates can forestall a recession for a while, and they certainly help companies with companies
unable
debt to meet
service refinancing
burdens. needsa than
But when by those
recession hits, unable
loan and tobond
coverprices
interest. As a result,
are more the next
influenced recession
by companies
may entail higher-than-expected losses on leveraged loans and high yield bonds that cannot
unable to meet refinancing needs than by those unable to cover interest. As a result, the next recession be refinanced.
may entail higher-than-expected losses on leveraged loans and high yield bonds that cannot be refinanced.
7
Our July 2019 piece analyzed the decline in lender protections that derive from leverage and interest coverage
maintenance
7
Our July 2019tests, mandatory
piece analyzed theprepayments
decline infromlender asset sales, negative
protections covenant
that derive fromrestrictions,
leverage and restricted
interest payments
coverage
clauses and a variety of clauses designed to limit leakage of assets from the collateral pool, investments in or transfers
maintenance tests, mandatory prepayments from asset sales, negative covenant restrictions, restricted payments
to unrestricted
clauses subsidiaries
and a variety anddesigned
of clauses affiliates,to
the ability
limit to add
leakage of senior
assets pari-passu or priority
from the collateral debt
pool, and lien dilution
investments by non-
in or transfers
guarantor subsidiaries. We also looked at how coverage and leverage measures are artificially boosted by
to unrestricted subsidiaries and affiliates, the ability to add senior pari-passu or priority debt and lien dilution by non-increasing
use of “EBITDA
guarantor add-backs”,
subsidiaries. We alsowhich
lookedrefers to companies
at how coverage and adding back measures
leverage non-recurring expensesboosted
are artificially and assumed merger
by increasing
synergies/cost savings to earnings, thereby artificially enhancing any measure derived from EBITDA. We concluded
use of “EBITDA add-backs”, which refers to companies adding back non-recurring expenses and assumed merger
with a look at savings
synergies/cost three recent examples
to earnings, of collateral
thereby stripping
artificially made
enhancing anypossible
measurebyderived
the decline
frominEBITDA.
covenantWe protections.
concluded
with a look at three recent examples of collateral stripping made possible by the decline in covenant protections. 11
11
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2 0 2 0OUTLOOK
Outlook
Percentage of non-financial companies with elevated A spike in weakest link companies

restructuring risk, % of respective market cap Number of issuers rated B- or lower with negative outlooks or ratings
45% on CreditWatch with negative implications
300
40%
35%
250
30%
25% 200
20%
15% 150
10%
MA RK E T S
100
CREDIT
5%
0%
Large Cap Mid Cap Small Cap 50
Source: Bloomberg, J.P. Morgan Asset Management. Q3 2019. Elevated Sep-06 Sep-08 Sep-10 Sep-12 Sep-14 Sep-16 Sep-18
restructuring risk is defined as a ratio of EBIT to interest expense < 3. Source: S&P Global Ratings Research. November 18, 2019.
Loans: high interest coverage and high leverage as well

5.0x 5.5
Debt to EBITDA
4.5x on new loans
5.0
4.0x
4.5
3.5x
4.0
3.0x Interest coverage on
outstanding loans
2.5x 3.5
'02 '04 '06 '08 '10 '12 '14 '16 '18
Source: S&P Global Market Intelligence LCD. Q3 2019.
When the next recession hits, there could also be stress on investment grade corporate bonds, given
the increase in the BBB share of the market compared to 2007. What could make matters worse: the
impact of the Volcker Rule, which led to a decline in market making and proprietary trading in the US
relative to the surge in fixed income supply. This could lead to pricing bottlenecks when/if investors exit.
BBB rated bonds take over post-crisis Debt stock expanding while liquidity shrinks
% of US investment grade corporate bond index Change in market size and turnover, 2006-2017
250%
20% Market size (debt stock)
December 2007 November 2019 200%
Turnover (trading
15% 150% volume/debt stock)
100%
10% 50%
0%
5% -50%
-100%
0% Mortgages Municipals High Yield Investment US
BBB3 BBB2 BBB1 A3 A2 A1 AA3 AA2 AA1 AAA grade Treasuries
Source: ICE/BAML, JPMAM. November 2019. Source: SIFMA, Finra Factbook, Bloomberg, JPMAM. 2017.
12
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Outlook
[3] Why does the US equity market keep outperforming Europe and Japan?
[3]
WhenWhy does the
someone tellsUS equity
you market
they’re making keep outperforming
a contrarian Europe and
recommendation Japan? Europe or Japan vs
to overweight
the US,someone
When be sure tells
and you
ask they’re
them how
makingmany times theyrecommendation
a contrarian made the same to recommendation
overweight Europe before. Why?
or Japan vs
Because they were probably wrong when they did, and by a lot. As we
the US, be sure and ask them how many times they made the same recommendation before. Why?have illustrated multiple
times, a strategy
Because they wereto overweight
probably the US and
wrong whenEmerging Markets
they did, and vs
byEurope
a lot. and Japan
As we havehas been one
illustrated of the
multiple
most consistently successful asset allocation approaches I have ever seen, and it worked
times, a strategy to overweight the US and Emerging Markets vs Europe and Japan has been one of again in 2019.
the
Since January 2010, US equities generated total returns of 252% vs 94% for Japan and 75%
most consistently successful asset allocation approaches I have ever seen, and it worked again in 2019. for Europe.
Since
Why January
has the2010, US equities generated
US consistently total returns
outperformed Europeofand 252% vs 94%The
Japan? for most
Japanplausible
and 75%reasons
for Europe.
have
8
more to
Why hasdothe
with
USmicro than macro
consistently . Think aboutEurope
outperformed where the andlargest
Japan?equity
Themarket
most gains often
plausible come from
reasons have
in a low-growth world: the Tech sector,
8 rather than sectors with lower and more volatile
more to do with micro than macro . Think about where the largest equity market gains often come earnings growth
from
(Basic
in Materials, world:
a low-growth Energy,the
Industrials).
Tech sector,In the US,than
rather the sectors
Tech sector’s weight
with lower andismore
much higherearnings
volatile than the other
growth
three, while the reverse is true in Europe and Japan (3 rd
chart). Second, when we look within
(Basic Materials, Energy, Industrials). In the US, the Tech sector’s weight is much higher than the other sectors, US
companies generally have higher profitability than European and Japanese counterparts (table).
three, while the reverse is true in Europe and Japan (3 chart). Second, when we look within sectors, US
rd As a result,
something generally
companies unusual would have to
have higher happen forthan
profitability theEuropean
US to underperform
and Japaneseoncounterparts
a sustained basis.
(table). As a result,
OUTPERFORMANCE
something unusual would have to happen for the US to underperform on a sustained basis.
Overweight US & EM, underweight Europe & Japan US outperforming Europe and Japan
3-year rolling out (under) performance vs MSCI All World Index Total return in US$, Jan 2010 = 100
US
Overweight US & EM, underweight Europe & Japan US outperforming Europe and Japan
10% 350 S&P 500
3-year rolling out (under) performance vs MSCI All World Index Total return in US$, Jan 2010 = 100
8% 350
10% 300 S&P 500
6%
8%
300
250
4%
6%
2% MSCI Japan
4% 250
200
0%
2% MSCI Japan
200
150
-2%
0%
-4% 150 MSCI Europe
-2% 100
1991 1994 1997 2000 2003 2006 2009 2012 2015 2018
-4% MSCI Europe
Source: 100
1991Bloomberg, JPMAM.
1994 1997 2000Q32003
2019. 2006
All equity
2009portfolio,
2012rebalanced
2015 2018 50
quarterly. 10% OW to US, 10% UW to Europe, 5% OW to EM, 5% UW to '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20
Source: Bloomberg,
Japan. Assumes JPMAM. Q3
no currency 2019. All equity portfolio, rebalanced
hedging. 50
Source: Bloomberg. December 30, 2019.
quarterly. 10% OW to US, 10% UW to Europe, 5% OW to EM, 5% UW to '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20
Japan. Assumes no currency hedging. Source: Bloomberg. December 30, 2019.
High growth tech drives US markets, growth laggards Return on Assets
drive Europe and Japan, % of total index market cap
High growth tech drives US markets, growth laggards
30% Consumer Consumer Return on Assets Communication
Country Technology Healthcare Financials
drive Europe and Japan,
Technology
% of total index market cap Staples Discretionary Services
30%
25% Consumer Consumer Communication
Technology Country Technology Healthcare Financials
US 5.9
Staples 6.1
Discretionary 9.8 5.6 5.6
Services 1.2
Materials +
25%
20% Energy + Europe 6.3 4.2 5.3 5.5 1.6 0.4
US 5.9 6.1 9.8 5.6 5.6 1.2
Materials
Industrials+ Japan 3.5 3.6 4.3 4.2 4.1 0.3
20%
15% Energy + Europe 6.3 4.2 5.3 5.5 1.6 0.4
Industrials Return on Equity
Japan 3.5 3.6 4.3 4.2 4.1 0.3
15%
10%
Consumer Consumer Return on Equity Communication
Staples Discretionary Services
10%
5% Consumer Consumer Communication
US 27.0
Staples 30.5
Discretionary 29.6 18.4 14.5
Services 10.4
5%
0%
Europe 16.4 13.2 11.2 19.0 8.7 7.9
US Europe Japan US 27.0 30.5 29.6 18.4 14.5 10.4
0%
Source: Bloomberg. December 30, 2019. Technology includes: GICS level 1 Japan 11.7 9.9 9.1 8.7 14.2 6.6
Europe 16.4 13.2 11.2 19.0 8.7 7.9
US
Information Technology + GICS level Europe Japan
3 Interactive Media & Services. Source: Bloomberg. December 30, 2019.
Source: Bloomberg. December 30, 2019. Technology includes: GICS level 1 Japan 11.7 9.9 9.1 8.7 14.2 6.6
Information Technology + GICS level 3 Interactive Media & Services. Source: Bloomberg. December 30, 2019.
8
Here’s a macro explanation: since 2014, the prime income population (aged 30-49) in the US has been growing
faster than in Europe. UN data indicates that this gap is expected to grow even wider from 2020-2025, as the US
8
Here’s a macro explanation: since 2014, the prime income population (aged 30-49) in the US has been growing
prime income population expands by 5% while the European prime income population declines by 3%.
faster than in Europe. UN data indicates that this gap is expected to grow even wider from 2020-2025, as the US
prime income population expands by 5% while the European prime income population declines by 3%. 13
13
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2 0 2 0OUTLOOK
Outlook
[4] How is China doing at a time of trade conflict, and what are implications for EM investors?
[4] How is China doing at a time of trade conflict, and what are implications for EM investors?
China can be selective about what information it reports; some government agencies have actually stopped
China can be
publishing selective data
important about 9
. what
So, we information it reports;
take different some government
approaches to get a senseagencies have actually
for what’s going on stopped
using
9
publishing
high-frequencyimportant data
data less . So, we
subject take differentorapproaches
to non-reporting manipulation.to get a sense
Both chartsfor what’s
below tell going
the sameon story:
using
high-frequency data less subject
after a stimulus-driven rise in to 2017non-reporting or manipulation.
and early 2018, China’s economyBoth charts belowgradually
has been tell the same story:
slowing
after
down.a stimulus-driven
Details include the rise in 2017
slowest and
fixed early
asset 2018, China’s
investment growth economy has been
since 1996, gradually
the weakest loanslowing
growth
down. Details include
since December thelowest
2017, the slowest CPIfixed asset investment
excluding growth
food since April 2016 since
and1996, the weakest
the sharpest declineloan growth
in industrial
since
profitsDecember
since 2011.2017, the lowest
Again, these areCPIcoincident
excluding food since April
indicators 2016 and
of current the sharpest decline in industrial
activity.
profits since 2011. Again, these are coincident indicators of current activity.
Part of the China weakness is due to the trade war; some is related to a deliberate slowing of growth to
Part of the
rein in theshadow
China weakness is due and
banking sector; to the trade part
another war; issome is related
a structural to a deliberate
decline that has beenslowing of growth
foreseen to
for years
rein in theslows
as China shadow its banking sector;pace
extraordinary andofanother
capitalpart is a structural
spending. decline
In 2014, thethat has been Board
Conference foreseen for yearsa
predicted
as Chinain slows
decline Chineseits GDP
extraordinary
growth topace 5.5% ofby
capital
2019 spending.
and to 4% by In 2025,
2014, athe
viewConference Board in
that is unfolding predicted
real time.a
decline
As for thein Chinese GDP only
trade war, growth to 5.5% of
10%-20% by 2019
Chinese andcorporate
to 4% by revenues
2025, a vieware that is unfolding
sourced outside in real time.
China, and
As for the to
according trade
MSCI, war,
onlyonly
2.8% 10%-20%
of Chineseof Chinese
corporate corporate
revenuesrevenues
are due are sourced
to sales outside
to the China,
US. The and
larger
according
problems to areMSCI, only 2.8%
domestic ones, of Chinesethe
including corporate
need for revenues
$350 bn in arecapital
due to forsales US. The
to the regional
struggling larger
banks.
problems are domestic ones, including the need for $350 bn in capital for struggling regional banks.
Our China economy monitor China coincident activity tracker
Our China economy monitor y/y % coincident activity tracker
China
Legend: employment surveys, exports, business y/y %
11%
conditions, GDP, corporate earnings, industrial
Hundreds
Legend: employment surveys, exports, business 11%
10%
production, retail sales, non-state owned
conditions, GDP, corporate earnings, industrial Hundreds
enterprise fixed asset investment 10%
9%
production, retail sales, non-state owned
CHINA
enterprise fixed asset investment 9%

8%
8%
7%
7%
6%
6%
5%
5%
4% Includes: electricity production, fiscal revenue,
real exports, port throughput, retail sales,
4%
3% Includes: electricity production, fiscal revenue,
financial services proxy, air/rail/highway traffic
real exports, port throughput, retail sales,
3%
2% financial services proxy, air/rail/highway traffic
2011 2012 2013 2014 2015 2016 2017 2018 2019 2013 2014 2015 2016 2017 2018 2019
2%
2011 CFLP,
Source: 2012 Markit,
2013 CC,
2014 2015
PBOC, CNBS,2016
MSCI, 2017
JPMAM.2018 20192019.
November 2013Bank2014
Source: of America 2015 2016 November
Merrill Lynch. 2017 2019.2018 2019
Source: CFLP, Markit, CC, PBOC, CNBS, MSCI, JPMAM. November 2019. Source: Bank of America Merrill Lynch. November 2019.
While coincident indicators are weak, there are some signs of a revival in 2020, such as the pickup in new
While coincident
manufacturing indicators
orders. are weak,
However, thesethere areare
signals some signs and
tentative of a highly
revivaldependent
in 2020, such as the pickup
on government in new
stimulus.
manufacturing orders. However, these signals are tentative and highly dependent on government stimulus.
China new orders rebounding
50+=expansion
China new orders rebounding
62
50+=expansion
62
60
60
58
58
56
56
54
54
52
52
50
50
48
48
46
46
44
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
44
2010 Markit
Source: 2011 PMI.
2012November
2013 2014
2019.2015 2016 2017 2018 2019
Source: Markit PMI. November 2019.
9
For details, see “The Case of the Mysterious Vanishing Statistics”, Gavekal Dragonomics, October 17, 2019.
9
For details, see “The Case of the Mysterious Vanishing Statistics”, Gavekal Dragonomics, October 17, 2019.
14
14
14
EYE 2020 OUTLOOK
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 J.P . M
10O R G A N 2020 Outlook
China increased fiscal spending and other support levers again in 2019, but so far, the impact on private
sector increased
China credit measures 11
is very modest.
fiscal spending and otherWhile corporate
support levers10and household
again in 2019,debt to far,
but so GDPthe
ratios increased
impact by a
on private
small amount in 2019, this
11 was more a signal of slowing GDP growth than of an increase in credit
sector credit measures is very modest. While corporate and household debt to GDP ratios increased by a demand.
small amount
China’s in 2019,fiscal
“fully-loaded” this was more a signal of slowing GDP
deficit growth than of an increase in credit demand.
Limited response to stimulus so far from private sector
Augmented deficit, % of GDP y/y %
China’s
-4%
“fully-loaded” fiscal deficit Limited response to stimulus so far from private sector
Augmented deficit, % of GDP 40%
y/y %
Hundreds
-4% Fiscal deficit plus 35%

40%
Hundreds
-6% investment via local

Fiscal deficit financing
government plus 30%
35%
-6% investment
vehicles, policylocal
via banks Mortgage lending
government financing
and other channels 25%
30%
-8% vehicles, policy banks Mortgage lending
20%
25%
-8% and other channels
15%
20%
-10%
10%
15%
-10% Total social financing
-12% 5%
10%
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2011 2012 2013 2014Total social
2015 2016financing
2017 2018 2019
-12% 5%
Source:
2010CEIC,
2011J.P. 2012
Morgan2013
Asset 2014
Management.
2015 2019.
2016 2017 2018 2019 Source:
2011J.P.2012
Morgan Asia Pacific
2013 2014 Equity
2015 Research,
2016 2017PBOC.2018
November
20192019.
Source: CEIC, J.P. Morgan Asset Management. 2019.
Other stresses in China: rising private sector corporate Source: bond J.P. Morgan Asia Pacific Equity Research, PBOC. November 2019.
defaults, which are a byproduct of both a
slowing economy and a liquidity squeeze due to tighter regulation
Other stresses in China: rising private sector corporate bond defaults, which of credit in are
“excess-capacity”
a byproduct ofsectors.
both a
Debt markets have become more difficult to access for private sector Chinese
slowing economy and a liquidity squeeze due to tighter regulation of credit in “excess-capacity” companies, while state
sectors.
owned
Debt enterprises
markets havecontinue
become to issue.
more This istonot
difficult the direction
access thatsector
for private ChinaChinese
presumably wants towhile
companies, go, given
state
CHINA
owned enterprises continue to issue. This is not the direction that China presumably wants to go,lack
its stated interest in having capital channeled to the more innovative parts of its economy. The of
given
liquidity for private companies coincides with a sharp decline in capital spending
its stated interest in having capital channeled to the more innovative parts of its economy. The lack of by private firms as well,
which we
liquidity forcapture
privateincompanies
our China coincides
monitor. with a sharp decline in capital spending by private firms as well,
which we capture
Bond defaults in our China
by Chinese privatemonitor.
firms Private companies losing access to debt markets
RMB billions Net issuance, RMB billions
Bond defaults by Chinese private firms
20.0
Private
160 companies losing access to debt markets 450
RMB billions Net issuance, RMB billions State owned enterprises
140 400
17.5
20.0 160 450
120 State owned enterprises 350
15.0 140 400
17.5 300
100 350
120 250
12.5
15.0 80 300
100 200
10.0
12.5 60 250
80 150
40 200
7.5
10.0 60 100
20 150
40 50
5.0
7.5 100
0 0
20 50
2.5
5.0 -20 Private companies -50
0 0
0.0
2.5 -40 -100
-20
2014 2015 2016 2017 Private
2018 companies
2019 -50
2015 2016 2017 2018 2019
0.0 -40 -100
Source: Gavekal, Wind. November 2019. Source:
2014 Gavekal,
2015 Wind. November
2016 2019.
2017 2018 2019
2015 2016 2017 2018 2019
Source: Gavekal, Wind. November 2019. Source: Gavekal, Wind. November 2019.
China has asked local governments to speed up issuance of infrastructure debt in 2020, and lowered capital
10
requirements
10 for infrastructure
China has asked investment
local governments projects,
to speed up allowing
issuancelarger debt to equity debt
of infrastructure ratios.inMinimum
2020, and capital investment
lowered capital
ratios for ports and shipping projects will be lowered to 20% from 25%.
requirements for infrastructure investment projects, allowing larger debt to equity ratios. Minimum capital investment
11
Total
ratios forSocial Financing
ports and shippingrefers to financing
projects provided
will be lowered to the
to 20% real25%.
from economy in China from banks (RMB & foreign
currency
11 loans, entrusted loans, trust loans, corporate bonds, financial
Total Social Financing refers to financing provided to the real economy institution holdings
in China of non-financial
from banks (RMB & corporate
foreign
equity, insurance company repayments, industry fund investments, and investment property) and
currency loans, entrusted loans, trust loans, corporate bonds, financial institution holdings of non-financial corporatefrom direct
financing channels (bill acceptances, equity fundraising, corporate bonds, local gov’t bonds).
equity, insurance company repayments, industry fund investments, and investment property) and from direct
financing channels (bill acceptances, equity fundraising, corporate bonds, local gov’t bonds). 15
15
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2 0 2 0OUTLOOK
Outlook
If there’s a rebound in China after the trade deal, which equity markets could benefit most? Part
of the rationale that I often see for adding European equities is that they would benefit from a rebound in
Chinese growth. Our analysis of the last 15 years confirms that European equities generally do benefit
when China leading indicators pick up. However, Emerging Market equities tended to rise a bit more.
Furthermore, EM equities trade at a discount to Europe, although not by as much as they used to given
the weaker performance of EM earnings. EM equities have underperformed Europe over the last decade,
in part due to the gradual slowdown in Chinese growth.
Emerging Markets: P/E discount vs Europe Europe vs Emerging Markets: 12-month forward earnings
MSCI EM P/E discount/premium vs Stoxx 600 based on fwd earnings Index, US$, January 1, 2015 = 100
20% 115
110
10%
105
100
0% MSCI Emerging
95 Stoxx 600 Markets
90
-10%
85
-20% 80
75
-30% 70
'06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 2015 2016 2017 2018 2019
Source: Datastream, IBES, J.P. Morgan Asset Management. Dec 27, 2019. Source: Datastream, IBES, J.P. Morgan Asset Management. Dec 27, 2019.
CHINA
One of the key things to keep in mind when investing in emerging markets: the over- or under-
valuation of EM currencies. The poor performance of EM equities in 2014-2016 was in part a
consequence of overvalued EM exchange rates in 2013. As shown below, a multifactor assessment of EM
exchange rates shows that they are roughly at fair value, after accounting for nominal exchange rates and
bilateral differences in trade, inflation, productivity and current account deficits.
Real trade weighted Emerging Market currency basket
8%
Overvalued
Hundreds
6%
4%
2%
0%
-2%
-4%
Undervalued
-6%
'04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19
Source: Goldman Sachs Economic Research. October 2019.
16
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2 0 2 0OUTLOOK
Outlook
[5] Why is US core inflation dead?
[5] Why is US core inflation dead?
First of all, it’s not dead. There’s little to no excess capacity left in the US economy and core inflation is
First
both of all, it’s
steady andnot
notdead. There’s
far from little preferred
the Fed’s to no excess2%capacity left
rate. But theinFed
theisUS economy
acting anddead
as if it’s corebyinflation
reducing is
rates steady
both yet again andtonot
be at
faror below
from thethe
Fed’sratepreferred
of inflation. So, what
2% rate. But isthe
theFed
Fedis seeing
acting other than
as if it’s stable
dead inflation
by reducing
expectations
rates yet again that makes
to be at orits boardthe
below members so complacent
rate of inflation. about
So, what inflation
is the risks going
Fed seeing forward?
other than stable inflation
expectations that makes its board members so complacent about inflation risks going forward?
US "output gap": a measure of spare capacity US core CPI and PCE
%, Actual
US GDP
"output relative
gap": to potentialof
a measure GDP
spare capacity y/y %
US core CPI and PCE
3%Actual GDP relative to potential GDP
%, 2.5%
y/y %
Post crisis excess Consumer
Hundreds
3%
2% 2.5%
capacity now exhausted price index
Consumer
Post crisis excess
Hundreds
2%
1%
capacity now exhausted 2.0% price index
1%
0% 2.0%
0%
-1%
1.5%
-1%
-2%
1.5%
-2%
-3%
Personal
-3%
-4% 1.0%
consumption
Personal
-4%
-5% 1.0% expenditures
consumption
-5%
-6% 0.5% expenditures
'90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19
-6% 0.5%
Source:
'90 Congressional Budget
'92 '94 '96 '98 '00 Office.
'02 '04Q3 '06
2019.'08 '10 '12 '14 '16 '18 Source:
'08BLS,
'09BEA.
'10November
'11 '122019.
'13 '14 '15 '16 '17 '18 '19
Source: Congressional Budget Office. Q3 2019. Source: BLS, BEA. November 2019.
We have shown the next few charts before, since they’re the foundation of the Fed’s belief that inflation
will remain
We low enough
have shown the nexttofew
justify continued
charts before,easysincemonetary policy.
they’re the The charts
foundation illustrate
of the the decline
Fed’s belief in labor
that inflation
bargaining
will remain power, the increased
low enough to justify speed of retail
continued easyprice readjustments,
monetary thecharts
policy. The impact of globalization
illustrate the declineoninwages,
labor
the reducedpower,
bargaining inclination of companies
the increased speedtoof respond to readjustments,
retail price labor cost increases with price
the impact hikes, deflation
of globalization from
on wages,
tech sector
the reduced and theofrise
inclination of industrial
companies to respond 12
robots .to These factors
labor cost have allwith
increases contributed to low,
price hikes, stable
deflation US
from
inflation,
the and anand
tech sector all-time highofin industrial
the rise the percentage
robotsof
12
. countries with low
These factors haveandall stable inflation
contributed to as well.
low, stable US
INFL ATIO N
inflation, and an all-time high in the percentage of countries with low and stable inflation as well.
Decline in labor bargaining power Online retailing increases price transparency
US
Private sector
Decline unionbargaining
in labor membershippower How longretailing
Online prices remain the same
increases aftertransparency
price a change (months)
40%
Private sector union membership 18
How long prices remain the same after a change (months)
Furnishings
40%
35% 18 and household
16 Furnishings
35%
30% 16 and household
14
30%
25% 14
12
25%
20%
12
10
20% Recreation and Food and non-
15%
10 electronics
Recreation and alcoholic beverages
Food and non-
15% 8
10% electronics alcoholic beverages
8
6
10%
5%
5% 6
4
0%
'47 '52 '57 '62 '67 '72 '77 '82 '87 '92 '97 '02 '07 '12 '17 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
0% 4
'47 Pre
Source: '52'83
'57 '62 post
Hirsch, '67 '83
'72 BLS.
'77 2018.
'82 '87 '92 '97 '02 '07 '12 '17 2008 2009
Source: A. 2010NBER
Cavallo, 2011
WP.2012
2018.2013 2014
Regular 2015
prices 2016
exclude sale2017
events.
Source: Pre '83 Hirsch, post '83 BLS. 2018. Source: A. Cavallo, NBER WP. 2018. Regular prices exclude sale events.
12
While robot shipments to the US rose by 60% from 2013 to 2018, China is the leader in the robot deployment,
with
12
4x more
While robotinstallations
shipments in to 2018
the USthan
roseinbythe US.from
60% The 2013
reason
tothis
2018,matters
Chinafor US inflation
is the leader in and the Fed:
the robot increased
deployment,
Chinese
with use ofinstallations
4x more robots could in dilute the impact
2018 than in the ofUS.rising
The wages
reason in China
this mattersas its
forlabor supply shrinks,
US inflation and theand
Fed:sustain the
increased
deflationary
Chinese use impact in the
of robots US dilute
could of Chinese goodsof
the impact imports. As shown
rising wages on page
in China as its3,labor
whilesupply
US goods imports
shrinks, and from China
sustain the
have declinedimpact
deflationary due tointhe
thetrade
US ofwar and the
Chinese rise in
goods tariffs, China
imports. is stillonthe
As shown largest
page import
3, while UScounterparty
goods importsforfrom
the US.
China
have declined due to the trade war and the rise in tariffs, China is still the largest import counterparty for the US.
17
17
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M A R K E T • MICHAEL
M I C H A E LCEMBALEST
C E M B A LE ST• J.P.
 J.PMORGAN
. MORGAN 2020
2 0 2 0OUTLOOK
Outlook
Globalization and US employee compensation Companies now responding to labor cost changes
% of GDP % of net value added through margins rather than prices
65% 0.76 1.0% -1.0%
Change in core PCE inflation from
Hundreds
Hundreds
60%
0.74 1% increase in unit labor costs
55% 0.8% -0.8%
50% 0.72
0.6% -0.6%
45%
0.7
40% Change in profit margins from 1%
0.4% -0.4%
35% 0.68 increase in unit labor costs (inverted)
30% World trade 0.2% -0.2%
0.66
25% US employee compensation
20% 0.64 0.0% 0.0%
'60 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10 '15 1975 1980 1985 1990 1995 2000 2005 2010 2015
Source: World Bank, Bureau of Economic Analysis. Q3 2019. Source: J.P. Morgan Economic Research. Q3 2019.
US: industrial robots per thousand workers Percentage of world GDP with low, positive headline
2.5 inflation (0-4%)
100%
90%
2.0
Acemoglu (MIT) 80%
70%
1.5 60%
Institute for
Employment 50%
1.0 Research Bruegel Inst. 40%
(Belgium)
30%
0.5 20%
10%
INFL ATIO N
0%
0.0
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
US
1993 1998 2003 2008 2013 2018

Source: MIT, IAB, Bruegel Institute. 2018. Source: World Bank, J.P. Morgan Asset Management. 2018.
The deflationary impact of the tech sector. Some Fed researchers have taken a closer look at the debate
around whether US productivity is mismeasured due to difficulty in capturing productivity gains from the
ICT sector (information, communication and technology). They now estimate that ICT prices have in reality
declined at a much faster pace than was reported in official inflation data. Given the ICT sector’s multiplier
effect on the rest of the economy, this could explain why the Fed has been able to run such easy
monetary policy over the decade without stoking wage or price inflation.
New analysis from the Fed shows more ICT deflation than
Reasons for lower revised ICT inflation estimates:
officially reported data, y/y change
5%  Better estimates of efficiency improvements from
hard-to-quantify advancements in operating
0%
systems, open-source software, cloud computing,
-5% storage and computing capacity
 More industry subsets included, such as cloud
-10%
computing and systems design services (14 in
-15% Software (official) alternative measure vs 7 in official data)
Software (new est)  New software price index including not just
-20% Computers/Comm equip (official)
application software, but also systems/OS
Computers/Comm equip (new est)
-25% software for desktops, portable devices, networks
and enterprises
1962
1992
2000
1960
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1994
1996
1998
2002
2004
2006
2008
2010
2012
2014
2016
2018
Source: Byrne and Corrado, "ICT Prices and ICT Services: What do they tell us  More accurate and broader industry pricing data
about Productivity and Technology?", 2017, updated 2019.
18
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2 0 2 0OUTLOOK
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[6] What are negative policy rates doing to European banks?
[6] What
From are negative
an investor’s policy nothing
perspective, rates doing
good.to European
Europeanbankbanks?
equity returns and valuations have trailed
the
From an investor’s perspective, nothing good. European bank equitythe
US since negative policy rates began in 2014. We don’t know counterfactual,
returns and perhaps
and valuations the
have trailed
ECB would argue that without negative rates, the region would be in even worse shape
the US since negative policy rates began in 2014. We don’t know the counterfactual, and perhaps the and rising
corporate
ECB woulddefaults
argue would make life
that without even worse
negative rates,forthe
banks. Whatever
region would be theincase,
evennegative
worse rates
shapehave
andbeen a
rising
major headache for bank investors in Europe, and it doesn’t look like they’re going away.
corporate defaults would make life even worse for banks. Whatever the case, negative rates have been a
major
US vs headache for bank
Europe: banks investors
total return in Europe, and it doesn’t
performance US vslook like they’re
Europe: goingtoaway.
banks price book
Total return in US$, Jan 2009 = 100 Ratio
US
350 vs Europe: banks total return performance US
1.8 vs Europe: banks price to book
Total return in US$,
Start Jannegative
of ECB 2009 = 100 S&P 500 Ratio Start of ECB negative
S&P 500
350
300 interest rate era banks index
1.6
1.8 interest rate era
Start of ECB negative Start of ECB negative banks index
S&P 500 1.4 S&P 500
300
250 interest rate era banks index
1.6 interest rate era
banks index
1.2
1.4
250
200
1.0
1.2
200
150
0.8
1.0
150
100
0.6
0.8
100
50 Euro STOXX 0.4
0.6
Euro STOXX
banks index banks index
50
0 Euro STOXX 0.2
0.4 Euro STOXX
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 index
banks 2019 2020 banks
2009 2010 2011 2012 2013 2014 2015 2016 2017 index
2018 2019 2020
0 0.2
Source:
2009 Bloomberg.
2010 2011 December
2012 201330, 2019.
2014 2015 2016 2017 2018 2019 2020 Source:
2009 Bloomberg.
2010 2011 December
2012 201330,2014
2019.2015 2016 2017 2018 2019 2020
Source: Bloomberg. December 30, 2019. Source: Bloomberg. December 30, 2019.
In fact, the ECB is considering cutting rates even further. ECB policy rates are currently -0.5%, and
amazingly, the ECB might reduce them to -1.0%. Current
In fact, the ECB is considering cutting rates even 13further. ECB policy net interest margins of German
rates banks-0.5%,
are currently are 0.9%.
and
If German banks passed half the impact to depositors , their net interest margins
amazingly, the ECB might reduce them to -1.0%. Current net interest margins of German banks are 0.9%. could fall by 25%. But
If none
if German of the
banksimpact
passedwere
halfpassed along,totheir
the impact net interest
depositors 13 margins
, their couldmargins
net interest fall in half
couldfromfallcurrent
by 25%.(paltry)
But
levels. Last point: for anyone looking at the minor rise in European bank profits in
if none of the impact were passed along, their net interest margins could fall in half from current (paltry)the last couple of years,
be aware
levels. that
Last this is
point: foralmost
anyoneentirely
lookingdueatto
thereduced loaninloss
minor rise provisions,
European bankrather than
profits rising
in the operating
last couple ofincome
years,
or falling operating expenses. In other words, this is not an organic increase in bank
be aware that this is almost entirely due to reduced loan loss provisions, rather than rising operating income profits.
or falling
Banks operatingdriven
profitability expenses. In other
by falling words, this is notPercentage
loan provisions an organic increase
of J.P. Morgan in
GBIbank
Broadprofits.
Index trading with negative yields
EUR billions Country Total 1-3 Years 3-5 Years 5-7 Years 7-10 Years 10+ Years
Banks profitability driven by falling loan provisions Percentage of
Denmark
J.P. Morgan
100% 100%
GBI Broad
100%
Index100%trading with
100%
negative yields
100%
800 billions
EUR Country Total 1-3 Years 3-5 Years 5-7 Years 7-10 Years 10+ Years
Germany 87% 100% 100% 100% 100% 55%
EU NEG ATIVE
Operating income Denmark 100% 100% 100% 100% 100% 100%
600
800 Finland 78% 100% 100% 100% 100% 0%
R ATE S
Germany 87% 100% 100% 100% 100% 55%
Operating income Sweden 73% 100% 100% 100% 50% 0%
400
600 Finland 78% 100% 100% 100% 100% 0%
Netherlands 72% 100% 100% 100% 100% 17%
Sweden 73% 100% 100% 100% 50% 0%
200
400 Profit/Loss Austria 68% 100% 100% 100% 100% 0%
Netherlands 72% 100% 100% 100% 100% 17%
France 65% 100% 100% 100% 100% 0%
0
200 Profit/Loss Austria 68% 100% 100% 100% 100% 0%
Ireland 62% 100% 100% 100% 100% 0%
France 65% 100% 100% 100% 100% 0%
-200
0 Belgium 56% 100% 100% 100% 100% 0%
Loan provisions Ireland 62% 100% 100% 100% 100% 0%
Japan 51% 100% 100% 100% 100% 0%
-400
-200 Belgium 56% 100% 100% 100% 100% 0%
Operating expense Loan provisions Spain 35% 100% 100% 15% 0% 0%
Japan 51% 100% 100% 100% 100% 0%
-600 Portugal 35% 100% 100% 0% 0% 0%
-400 Spain 35% 100% 100% 15% 0% 0%
2007 2008 2009 2010Operating expense
2011 2012 2013 2014 2015 2016 2017 2018 Italy 14% 60% 0% 0% 0% 0%
-600 Portugal 35% 100% 100% 0% 0% 0%
Total 52% 93% 85% 69% 74% 5%
Source:
2007ECB,
2008Barclays European
2009 2010 2011 Research.
2012 20132018. Italy J.P. Morgan14%
2014 2015 2016 2017 2018 Source: Global Index60%
Research, J.P.0% 0%
Morgan Asset Management. 0%
December 0%
11, 2019.
Total 52% 93% 85% 69% 74% 5%
Source: ECB, Barclays European Research. 2018.
Whether negative rates are a symptom, a disease or a cure, I hope they never emigrate from
Source: J.P. Morgan Global Index Research, J.P. Morgan Asset Management. December 11, 2019.
Europe.
WhetherPrinceton
negativeeconomist
rates areMarkus Brunnermeier
a symptom, believes
a disease or a incure,
a “reversal
I hope rate”: a tipping
they never point beyond
emigrate from
which damage to banks by further rate reductions outweighs benefits to the economy,
Europe. Princeton economist Markus Brunnermeier believes in a “reversal rate”: a tipping point in which case more
beyond
easing becomes
which damage contractionary
to banks rather
by further rate than stimulative.
reductions In other
outweighs benefits words,
to the as bank
economy, in profitability
which case morefalls,
their ability to generate new capital deteriorates, which undermines their ability to make
easing becomes contractionary rather than stimulative. In other words, as bank profitability falls,new loans.
their ability to generate new capital deteriorates, which undermines their ability to make new loans.
13
Some smaller German banks announced that they will begin charging negative deposit rates to new accounts.
13
Some smaller German banks announced that they will begin charging negative deposit rates to new accounts. 19
19
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2 0 2 0OUTLOOK
Outlook
[7] Will value stocks ever stop underperforming growth?
[7] Will
Since value
2010, stocks
value has ever stop underperforming
underperformed growth to angrowth?
extent rarely seen in the last 70 years, a time when
being a value-oriented investor paid significant
Since 2010, value has underperformed growth to an extent dividends for investors andinactive
rarely seen managers.
the last 70 years,Inarecent years
time when
however, investors piled into growth, momentum and bond proxy stocks, either in pursuit
being a value-oriented investor paid significant dividends for investors and active managers. In recent years of scarce
earnings growth
however, or desperately
investors needed dividends.
piled into growth, momentumThe andunderperformance
bond proxy stocks, of value
eitherhas
in been a significant
pursuit of scarce
challengegrowth
earnings for active equity managers
or desperately needed since 2010, aThe
dividends. topic we addressed in detail
underperformance in ahas
of value special
been issue Eye on
a significant
the Market released earlier this year 14
.
challenge for active equity managers since 2010, a topic we addressed in detail in a special issue Eye on
the Market released earlier this year14.
Cumulative excess return of cheapest value stocks over Premium paid for momentum and low vol at historic highs
most expensive value stocks, Index, Jan 1926 = 100, log scale vs value, P/E difference divided by market P/E
Cumulative excess return of cheapest value stocks over Premium paid for momentum and low vol at historic highs
2.0
most expensive value stocks, Index, Jan 1926 = 100, log scale
500,000 vs value, P/E difference divided by market P/E
1.8
2.0
500,000 1.6
50,000
1.8 P/E: momentum vs value
1.4
1.6
50,000 1.2 P/E: momentum vs value
1.4
5,000 1.0
1.2
0.8
5,000 Pre 2007 trend 1.0
500 0.6
0.8
Pre 2007 trend 0.4
500 0.6
0.2
50 0.4 P/E: low vol vs value
1926 1936 1946 1956 1966 1976 1986 1996 2006 2016 0.0
0.2
50 1995 1998 2001 2004 2007 2010 P/E:2013
low vol2016
vs value
2019
Source: French Data Library, J.P. Morgan Asset Management. Universe = 0.0
1926 1936 1946 1956 1966 1976 1986 1996 2006 2016
NYSE, AMEX, Nasdaq. October 2019. Source:
1995 J.P. Morgan
1998 Asset 2004
2001 Management.
2007 November 2019. 2016 2019
2010 2013
Source: French Data Library, J.P. Morgan Asset Management. Universe =
Other than technicals showing extreme P/E discounts forSource:
NYSE, AMEX, Nasdaq. October 2019.
valueJ.P. Morgan Asset Management. November 2019.
stocks, are there fundamental reasons to
believe they might reverse some of their underperformance?
Other than technicals showing extreme P/E discounts for value stocks, are Towards the there
end offundamental
2019, value reasons
started toto
see signs of life relative to growth stocks, although it was confined to large cap stocks
believe they might reverse some of their underperformance? Towards the end of 2019, value started to so far. Stresses in
the IPO and pre-IPO market appeared to spark increased concern about the proliferation of
see signs of life relative to growth stocks, although it was confined to large cap stocks so far. Stresses in IPOs with little
to no
the IPOearnings growth
and pre-IPO (see appeared
market page 26-27), and increased
to spark about overpriced
concern growth
about the stocks at risk from
proliferation an with
of IPOs anti-trust
little
revival
to outlined in
no earnings the next
growth section.
(see Other catalysts
page 26-27), and aboutcould include angrowth
overpriced eventual recovery
stocks in energy
at risk from anstocks now
anti-trust
that capital
revival discipline
outlined in the has
nextreturned to the catalysts
section. Other sector, and
couldtheinclude
eventual
an normalization
eventual recoveryof USin monetary policy.
energy stocks now
that capital discipline has returned to the
Second highest peak for growth stocks on record sector, and the eventual normalization of US monetary
S&P 500 and R1000 growth versus value cumulative policy.
Ratio performance, Cumulative growth return - cumulative value return
Second highest peak for growth stocks on record S&P 500 and R1000 growth versus value cumulative
55%
2.2
Ratio performance, Cumulative growth return - cumulative value return
Hundreds
P/E difference of most 50%

2.0
2.2 55% Russell 1000
expensive vs cheapest 45%
Hundreds
P/E difference of most 50%

1.8
2.0 US large cap stocks, 40% Russell 1000
expensive
divided by vs cheapest
market P/E
45%
35%
1.6
1.8 US large cap stocks, 40%
30%
divided by market P/E 35%
25%
1.4
1.6 30%
20% S&P 500
INVE STIN G
1.2
1.4 25%
VA LUE
15%
20%
10% S&P 500
1.0
1.2
15%
5%
0.8
1.0 10%
0%
5%
0.6
0.8 -5%
0%2015 2016 2017 2018 2019 2020
1995 1998 2001 2004 2007 2010 2013 2016 2019
0.6 -5%
Source:
1995 J.P. Morgan
1998 Asset 2004
2001 Management.
2007 November 2019. 2016
2010 2013 2019 Source:
2015 Bloomberg.
2016December 27,
2017 2019. 2018 2019 2020
Source: J.P. Morgan Asset Management. November 2019. Source: Bloomberg. December 27, 2019.
14
Active Equity Management industry analysis. We analyzed the performance of 6,700 active equity managers
across
14 23Equity
Active style categories since 1996.
Management industry Asanalysis.
you wouldWe expect, there
analyzed thewere significantofperformance
performance 6,700 active challenges in US
equity managers
large cap core, value and growth styles. However, we also found that more than 50% of managers
across 23 style categories since 1996. As you would expect, there were significant performance challenges in US outperformed
in several
large othervalue
cap core, US and
andnon-US
growthcategories since 2014
styles. However, despite
we also foundall the
thatmarket distortions
more than 50% ofintroduced
managers by the Federal
outperformed
Reserve, which I consider a positive sign for the long term viability of active equity management.
in several other US and non-US categories since 2014 despite all the market distortions introduced by the Federal
Reserve, which I consider a positive sign for the long term viability of active equity management. 20
20
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Outlook
For value investors, the time to despair may be ending. We have company in believing that the possible
last days of
For value extremethe
investors, value
timeunderperformance
to despair may be areending.
unfolding.We have company in believing that the possible
last days of extreme value underperformance are unfolding.
 Cliff Asness of AQR, who generally cautions against “factor timing”, has increased his bet on value as
a factor
 Cliff
15
Asness . According
of AQR, who to AQR, in thecautions
generally first eight years“factor
against after the financial
timing”, crisis,
has value underperformance
increased his bet on value as
was “rational”,
15 since expensive companies could justify price premiums by delivering
a factor . According to AQR, in the first eight years after the financial crisis, value underperformance on earnings, sales,
margins
was etc. However,
“rational”, for the past
since expensive 2 years,could
companies valuejustify
underperformance
price premiums hadbyless to do with
delivering fundamentals
on earnings, sales,
and was mostly a reflection of “irrational” changes in investor sentiment (i.e.,
margins etc. However, for the past 2 years, value underperformance had less to do with fundamentals multiple expansion)
 and was mostly
To support a reflection
this assertion, of “irrational”
Asness changes
uses the chart in investor
below. It showssentiment (i.e.,valuation
the relative multiple of
expansion)
the cheapest
versus the most expensive US large cap and mid cap stocks based on price/book,
 To support this assertion, Asness uses the chart below. It shows the relative valuation of the cheapest price/earnings (trailing
and forward) and price to sales. The spread between the cheapest and most expensive
versus the most expensive US large cap and mid cap stocks based on price/book, price/earnings (trailing stocks is at its
widest level since 2002, although it is nowhere near the peaks of 1999-2000
and forward) and price to sales. The spread between the cheapest and most expensive stocks is at its
widest level since 2002, although it is nowhere near the peaks of 1999-2000
How cheap is value? Very
Composite premium for growth stocks vs value based on of price/book, price/
How cheap
trailing is value?
earnings, Very earnings and price/sales, Index, 100 = average
price/forward
Composite premium for growth stocks vs value based on of price/book, price/
150
trailing earnings, price/forward earnings and price/sales, Index, 100 = average
150
140
140
130
130
120
120
110
110
100
100
90
90
80
'81 '83 '85 '87 '89 '91 '93 '95 '97 '99 '01 '03 '05 '07 '09 '11 '13 '15 '17 '19
80
'81 Cliff
Source: '83 Asness,
'85 '87 "It's
'89Time
'91 for
'93a Venial
'95 '97 '99 '01 '03
Value-Timing Sin".'05 '07 2019.
August '09 '11 '13 '15 '17 '19
Source: Cliff Asness, "It's Time for a Venial Value-Timing Sin". August 2019.
One last comment on the possibility of a sustained US value recovery. In the past, US value outperformance
vs growth
One generally
last comment oncoincided withofUS
the possibility underperformance
a sustained vs Europe.
US value recovery. In theSome
past,ofUSthese
valueperiods occurred
outperformance
during the unsustainable Southern European growth/credit boom in 2005/2006 which
vs growth generally coincided with US underperformance vs Europe. Some of these periods occurredI do not believe will
repeat itself. Even so, a US value recovery could occur at the same time as a repricing of
during the unsustainable Southern European growth/credit boom in 2005/2006 which I do not believe will expensive US
growthitself.
repeat stocks,Even
in which
so, acase Europe
US value could outperform
recovery could occurthe
at US,
the at
sameleasttime
temporarily.
as a repricing of expensive US
growth stocks, in which case Europe could outperform the US, at least temporarily.
INVE STIN G
VA LUE
15
Cliff Asness, “It’s Time for a Venial Value-Timing Sin”. November 7, 2019.
15
Cliff Asness, “It’s Time for a Venial Value-Timing Sin”. November 7, 2019. 21
21
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[8] What are the greatest risks to markets from a possible progressive overhaul of the US economy?
The tables below outline progressive proposals on taxation, the corporate sector, labor, energy, healthcare,
investment, trade and student debt, most of which have been put forward by Senator Warren. For many
of these proposals to be adopted, Democrats would have to take control of the Senate and not just the
White House; the new Senate Majority Leader would have to agree to put these proposals on the docket;
and Democrats might have to end the filibuster. However, in the wake of recent precedent (Trump’s
unilateral actions on environmental, trade and border issues), some progressive policies could be enacted
via Executive Action and regulation rather than through legislation.
Progressive Democratic Agenda

Taxation Corporate Labor
Double capital gains tax rate on earners Ban on state ‘right to work’ laws, ‘fair share’ fees to allow
Curb or prohibition on stock buybacks
over $1mm unions to collect fees from non-members
Break up big banks, reverse Trump dereg.
Eliminate step-up in basis on death on capital/liquidity, impose financial Eliminate secret ballots in worker union elections
transaction taxes
Worker election of 40%+ of board members (co-
Tax unrealized capital gains every year Break up big tech, reinstate Net Neutrality
determination)
Federal charter required by public companies
Treat cap gains and dividends as ordinary
with revenues >$1bn, must produce Industry-level sectoral bargaining
income for tax purposes
“material public benefit”
…and “material positive impact on society” to
Wealth tax of 2% over $50mm Reduced classification of independent contract workers
obtain charter from Dep’t of Commerce
Repeal indiv. tax cuts, means-test SocSec/ “Office of US Corporations” and State Penalties for Federal contractors with gender pay
Medicare, top estate tax rate of 77% Attorney Generals can sue to revoke charters disparities
New payroll tax of 14.8% > $250k in Political expenditures subject to 75% NLRB penalties on companies and executives for violating
income, possibly to include net inv income approval by all shareholders worker rights and wrongful termination
Private equity firms must guarantee
Eliminate corporate tax cuts, surtax on
repayment of debt and pensions of acquired Increased protections for striking workers
corporate profits over $100mm
companies
Healthcare Energy Student debt
Medicare for All with no deductibles or Ban hydraulic fracturing on private land and Reduce student debt for 95% of Americans with student
copays fracturing/drilling on federal land debt (45 million people)
Ban fossil fuel exports, no new nuclear power Wipe out student debt entirely for 75% of students with
Ban private health insurance
plants debt
Drug price caps, gouging penalties, and Repeal traditional energy friendly tax
Universal free public college education
reimportation allowances provisions
Allow HHS to manufacture/sub-contract $3 trillion over 10 years to subsidize transition
Estimated cost = $955 billion
generic drugs to 100% clean energy
Trade: a 9 point eligibility test for trade counterparties
Enforce core labor rights of International Labour Organization such as collective bargaining and elimination of child labor
Adhere to Trafficking Victims Protection Act
Ratify Convention on Combating Bribery of Foreign Public Officials
Uphold internationally recognized human rights
Join Paris Climate Agreement and have a national plan to reduce long-term emissions
PRO G RE SSIVE
Comply with tax treaties with the US and participate in the OECD Base Erosion and Profit Shifting project
S W EEP
Recognize and enforce religious freedom

Eliminate all domestic fossil fuel subsidies
No inclusion on Department of Treasury monitoring list for currency practices
Source: Cornerstone Macro Research, Urban Institute, Medium, CNBC, warren.senate.gov. 2019.
22
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KEETT• MICHAEL AEELLCEMBALEST • J.P.
 J .MORGAN
2020 OUTLOOK
EEY ON
O TTH MMA
ARRK MIICCH
M HA CCEEM
MBBA
ALE
LEST
ST P. MORGAN
 J.P. MORGAN 22002200 O
Ouuttllooookk
16
Potential equity
Potential equity market
market risks
risks from
from aa progressive
progressive agenda
agenda16
 Equity
Equity market
market sector
sector implications.
implications. TheThe greatest
greatest valuation
valuation risks
risks could
could be
be in
in store
store for
for banks,
banks, biotech,
biotech,
chemicals, energy E&P, healthcare managed payers and service providers,
chemicals, energy E&P, healthcare managed payers and service providers, independent power independent power
producers, integrated oil & gas, medical devices, megacap internet, payment processors,
producers, integrated oil & gas, medical devices, megacap internet, payment processors, branded branded
specialty pharmaceuticals
specialty pharmaceuticals and and specialty/consumer
specialty/consumer finance.
finance. On healthcare, while
On healthcare, while aa lot
lot of
of negative
negative
sentiment is priced in already, many proposals are based on eliminating private sector
sentiment is priced in already, many proposals are based on eliminating private sector rents in rents in the
the
healthcare system, so I could imagine additional downside risk depending on
healthcare system, so I could imagine additional downside risk depending on the details the details
 While
While there
there is
is little
little evidence
evidence that
that companies
companies pursue
pursue stock
stock buybacks instead of
buybacks instead of hiring
hiring and
and capital
capital
spending, there
spending, there appears
appears to to bebe progressive
progressive support
support for stock buyback
for stock buyback restrictions
restrictions or or an
an outright
outright
ban. Sectors
ban. Sectors most
most reliant
reliant on on buybacks
buybacks as as aa contributor
contributor to to investor
investor returns:
returns: Information
Information Technology,
Technology,
Financials, and Consumer Discretionary. Corporate demand for stock
Financials, and Consumer Discretionary. Corporate demand for stock relative to investor demand relative to investor demand
is remarkable: buybacks were the single largest source of US equity
is remarkable: buybacks were the single largest source of US equity demand each year since 2011, demand each year since 2011,
averaging $450 billion annually. In comparison, average annual
averaging $450 billion annually. In comparison, average annual demand from households, mutual demand from households, mutual
funds, pension
funds, pension funds,
funds, andand foreign
foreign investors
investors was was less
less than
than $10
$10 billion
billion each
each
 In 2016,
In 2016, the
the US
US had
had the
the highest
highest marginal
marginal effective
effective corporate
corporate taxtax rate
rate inin the
the G-7
G-7 and
and within
within the
the 34
34
countries in the OECD. The 2017 tax bill lowered US corporate tax rates
countries in the OECD. The 2017 tax bill lowered US corporate tax rates in line with other countries. in line with other countries.
result, aa repeal
As aa result,
As repeal would
would push push effective
effective US US corporate
corporate tax tax rates
rates back
back to to where
where they
they were
were before.
before.
Corporate tax cuts boosted S&P earnings on a one-time basis by 8%-10%
Corporate tax cuts boosted S&P earnings on a one-time basis by 8%-10% in 2018. Assuming a 17.5x in 2018. Assuming a 17.5x
multiple, a corporate tax cut repeal could in isolation reduce the fair value
multiple, a corporate tax cut repeal could in isolation reduce the fair value of the S&P 500 by the same of the S&P 500 by the same
amount. This
amount. This assumes
assumes complete
complete repeal repeal of of the
the corporate
corporate tax tax cuts,
cuts, but
but does
does not not include additional
include additional
proposals by Senator Warren to impose a 7% windfall profit
proposals by Senator Warren to impose a 7% windfall profit surtax on earnings over $100 mmsurtax on earnings over $100 mm toto
finance renewable energy. Sectors that benefitted the most from tax cuts in
finance renewable energy. Sectors that benefitted the most from tax cuts in terms of declining effective terms of declining effective
tax rates:
tax rates: Communication
Communication Services,Services, Consumer
Consumer Discretionary
Discretionary and and Financials
Financials
 Hydraulic fracturing
Hydraulic fracturing now now accounts
accounts for for 60%-80%
60%-80% of of USUS oil,
oil, natural
natural gasgas and
and natural
natural gas
gas liquid
liquid (NGL)
(NGL)
production. As a result, domestically produced oil and gas derived
production. As a result, domestically produced oil and gas derived from hydraulic fracturing also from hydraulic fracturing also
accounts for
accounts for 40%
40% of of total
total US US primary
primary energy
energy consumption.
consumption. While While US US renewable
renewable powerpower generation
generation is is
growing, the pace is almost certainly not fast enough to immediately
growing, the pace is almost certainly not fast enough to immediately abandon fractured natural gas abandon fractured natural gas
and oil
and oil given
given US US goals
goals of of decommissioning
decommissioning aging aging coal
coal and
and nuclear
nuclear power
power plants, and of
plants, and of reducing
reducing
reliance on foreign oil. In the absence of an interconnected, nationwide
reliance on foreign oil. In the absence of an interconnected, nationwide electricity grid and cheap electricity grid and cheap
energy storage, natural gas is a critical complement to intermittent renewable
energy storage, natural gas is a critical complement to intermittent renewable energy. For more details, energy. For more details,
see our
see our Cold
Cold Turkey
Turkey piece
piece from
from September
September 2019 2019
PRO G RE SSIVE
S W EEP
16
16
II don’t
don’t think redistribution is
think redistribution is inherently
inherently positive
positive oror negative
negative for for the
the economy;
economy; itit depends
depends on on aa lot
lot of
of factors,
factors, such
such
as the
as the impact
impact ofof higher
higher tax
tax rates
rates onon propensities
propensities toto invest
invest and
and consume
consume at at different
different income
income levels,
levels, the
the efficiency
efficiency with
with
which the Federal government allocates tax revenue to productive/unproductive
which the Federal government allocates tax revenue to productive/unproductive programs, the impact of programs, the impact of
redistribution on consumer and investor sentiment, and the degree to which Federal
redistribution on consumer and investor sentiment, and the degree to which Federal revenue-raising targets are revenue-raising targets are
affected/circumvented by
affected/circumvented by changes
changes in in corporate
corporate oror individual
individual behavior.
behavior. Even Even so,
so, II do
do think
think that
that the
the broader
broader aa
redistribution agenda is, the greater the chance that it adversely impacts the private sector
redistribution agenda is, the greater the chance that it adversely impacts the private sector in unanticipated ways. in unanticipated ways.
And as shown on page 7, Warren’s tax hike proposals are 2.5x greater than
And as shown on page 7, Warren’s tax hike proposals are 2.5x greater than the FDR tax hikes of the 1930’s.the FDR tax hikes of the 1930’s.
In our
In our June
June 2019
2019 analysis
analysis of
of Nordic
Nordic countries,
countries, wewe found
found thatthat in
in some
some ways,
ways, Nordic
Nordic countries
countries are
are even more business-
even more business-
friendly than
friendly than the
the US;
US; that
that their
their tax
tax systems
systems rely
rely primarily
primarily on on consumer
consumer (VAT)
(VAT) and
and payroll
payroll taxes
taxes to
to finance
finance entitlements;
entitlements;
and that
and that their
their healthcare
healthcare systems
systems generally
generally require
require both
both co-pays
co-pays and and deductibles
deductibles to to manage
manage cost.
cost. In In other
other words,
words,
even the most progressive countries need a vibrant private sector and incentives
even the most progressive countries need a vibrant private sector and incentives for citizens to invest in for citizens to invest in
new businesses and capital projects in order to afford redistribution
new businesses and capital projects in order to afford redistribution in the first place. in the first place.
23
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 On tech, there’s a debate as to whether tech giants are adversely affecting consumers, and/or if they
are adversely impacting competitors. We will not debate that here; the regulatory table below shows
that after a 50 year decline in anti-trust investigations (particularly on the tech sector), many politicians
believe that the answer to one or both of these questions is “yes”. If an anti-trust revival targets the
tech sector, it could have an adverse impact on markets since (a) the tech sector has seen the largest
degree of concentration and consolidation of large firms, (b) the tech sector has more than doubled
the return on the rest of the stock market since 2010 and (c) the largest tech companies have been
active acquirers of both revenues and intellectual capital
Technology sector anti-trust and other proposals (below dotted line = already implemented)
Companies affected Action
Facebook, Google New York/Texas launch antitrust investigations; 48 states sign onto Google investigation
Amazon, Apple, Facebook, Google House Judiciary Committee requests tech executives’ emails in antitrust probe
Amazon FTC launches antitrust investigation over anti-competitive behavior
Amazon, Facebook, Google Broad Department of Justice antitrust investigation
Warren proposes to break up tech companies, designate tech platforms as utilities separate from other
FAANG
businesses, and reverse anti-competitive mergers
California tech "Digital data dividend" paid by tech companies to users whose data is monetized
Amazon, Uber, Lyft California passes bill to reclassify gig-economy contract workers as employees
Facebook Federal Trade Commission fines Facebook $5 billion for privacy practices
Qualcomm Ruling that Qualcomm violated antitrust law
Amazon, eBay, Airbnb Require online platforms to collect local taxes
Source: Bloomberg, Bridgewater, LA Times, The Hill, FTC, WSJ, NYT. 2019
Number of Department of Justice antitrust investigations Lower FTC/DOJ antitrust enforcement rates on tech sector
initiated Rate of agency challenges
600 20%
All sectors Data processing, hosting and related services
Mergers (primary identifiers of Google, Amazon & Facebook)
500
Monopoly 15%
400
Competition
300 10%
200 0%
5%
100
0 0%
All sectors Tech All sectors Tech
'70 '74 '78 '82 '86 '90 '94 '98 '02 '06 '10 '14 '18 FTC DOJ
Source: United States Department of Justice. 2018. Source: Dr. Diana Moss, American Antitrust Institute. 2019.
S&P effective tax rate by sector S&P sales weighted foreign revenue exposure by sector
40% 70%
Hundreds
Communication Services
Information Technology
Information Technology
35% 60%
30%
Telecommunication
50%
Consumer Staples
Consumer Staples
25%
40%
PRO G RE SSIVE
20%
S W EEP
30%
Real Estate
Real Estate
Healthcare
Healthcare
Industrials
Industrials
Financials
Financials
15%
Materials
Materials
S&P 500
S&P 500
20%
Utilities
Utilities
Energy
Energy
10%
5% 10%
0% 0%
Source: S&P Global Market Intelligence. 2016. Source: S&P Global Market Intelligence. Q3 2019.
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C E M B A LE ST  J.P. MORGAN
• J.P. MORGAN 2 0 2 0OUTLOOK
2020 Outlook
A closer look: customized European digital taxes designed to apply to US tech giants
The US tech sector is facing mounting pressures in the form of digital service taxes (DST) on revenues
paid to them by European advertisers. Tired of waiting for the OECD’s “Pillar I” tax proposals to be sorted
out, France, Italy, Austria and Turkey have enacted DSTs of their own. The tortured logic involved is based
on a concept called “user-created value”: since users of services like Facebook contribute to brand value
by providing information to the company which enables it to earn ad revenues, such users are essentially
undertaking so-called “supply-side functions” that would normally be undertaken by the business itself.
Furthermore, the jurisdiction in which the users reside can tax this value as it is created, using locally
generated advertising revenues as a value proxy. These digital taxes would be paid by the technology
company in addition to whatever income or consumption taxes the company is already paying.
If this makes little sense to you, you’re in good company. A 2019 IMF paper described the theoretical
underpinning of DSTs as being highly problematic, while the Petersen Institute described DSTs as de facto
tariffs whose discrimination against US firms could not be more blatant. European governments have
simply drafted language that avoids conceding the obvious: they are taxing consumption of US services
exports, which are de facto tariffs that in all likelihood violate existing bilateral tax treaties.
An assertion by the French Finance Minister that its DST does not “single out US companies” shows how
disingenuous the arguments have now become:
 Given high worldwide revenue thresholds used in applying digital advertising taxes and the revenues that
they apply to, US tech giants are practically the only entities subject to them. DST taxable revenues
include digital advertising (Google, Facebook), digital marketplaces to sell goods and services (Amazon,
eBay, Uber, Airbnb) and transmission of user data to other users (Facebook, Twitter). Subscription fees
and in-app purchases are excluded, which could have affected European firms
 French officials have elsewhere stated that the DST was explicitly designed so as to avoid slowing down
e-commerce innovation and the digitization of France’s own businesses, and the French Finance Minister
himself has referred to its DST as the “GAFA” tax (Google, Amazon, Facebook, Apple)
 The French DST is applied to gross revenues rather than to net income and also results in double (or
triple) taxation, both of which contravene the architecture of the international tax system in the
developed world. Some DST proposals allow for VAT taxes to be deducted first, which is another direct
swipe at US firms that are not subject to them in their own jurisdiction
 Not long ago, the OECD itself cautioned against creating new tax rules applied to the digital
economy, including a 2015 report with contributions and recommendations from an EU Commission of
tax experts. In this report, the OECD wrote that “it is difficult, if not impossible, to ring-fence the digital
economy from the rest of the economy for tax purposes”. Apparently this view has changed
In December 2019, US Treasury Secretary Mnuchin wrote to the OECD indicating US opposition to the DST
concept, citing “departures from arm’s length transfer pricing and taxable nexus standards, longstanding
pillars of the international tax system upon which US taxpayers rely”. How the US, the OECD and the
WTO resolve all of this is unclear, although our international tax contacts believe that certain
countries will proceed with digital taxes and face possible US retaliation. The outcomes are
PRO G RE SSIVE
important given the low effective tax rate of the US tech sector and its high degree of foreign sourced S W EEP
revenue, as shown on the prior page.
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[9] The IPO market: “Prophets vs Profits”
[9] The
The IPO market:
struggles of some “Prophets vs Profits”
tech companies in the IPO and pre-IPO market have gotten a lot of headlines recently.
What’s lost of
The struggles in some
the shuffle: most real
tech companies in thetechnology IPO’s
IPO and pre-IPO are doing
market just afine.
have gotten lot of “Tangential tech”
headlines recently.
companies
What’s lost included
in theinshuffle:
the broad tech real
most category but whichIPO’s
technology are not
arepure techjust
doing are for the most
fine. part thetech”
“Tangential ones
that are struggling.
companies included inMany of these
the broad tech“tangential
category but tech” companies
which havetech
are not pure sales
aregrowth
for thebelow 50%the
most part (above
ones
which post-IPO
that are returns
struggling. haveofgenerally
Many been higher),
these “tangential and
tech” in the case
companies of Uber,
have the company
sales growth below also
50%fails the
(above
“rule of 40” test (i.e., sales growth plus free cash flow margin). To be clear, practically every
which post-IPO returns have generally been higher), and in the case of Uber, the company also fails the single one of
these IPO40”
“rule of companies
test (i.e.,had
salesa growth
negativeplus
operating margin
free cash as of theirTo
flow margin). most recentpractically
be clear, earnings every
reportsingle
due to high
one of
SG&A spending,
these IPO something
companies investorsoperating
had a negative expect willmargin
eventually
as ofchange.
their most recent earnings report due to high
SG&A spending, something investors expect will eventually change.
What’s wrong with the performance of 2018/2019 tech IPOs?
Not much, as long as what you're buying is actually a real technology company
What’s wrong with the performance of 2018/2019 tech IPOs?
Performance relative to IPO price (or direct listing price)
Not
120%much, as long as what you're buying is actually a real technology company
Performance relative to IPO price (or direct listing price) Pure tech: software as a service model, usually (but not always) B2B and cloud-based,
+201%
+192%
+191%
+154%
120% delivered at close to zero marginal cost with sharply increased returns to scale
Pure tech: software as a service model, usually (but not always) B2B and cloud-based,
+201%
+192%
+191%
+154%
100%
delivered at close
Marketplace to zerotransactional
companies: marginal costsales
with model,
sharplyoften
increased
reliantreturns to scale
on sub-contracted sales
100% or work force, and often subject to substantial ecosystem third party costs
80%
Marketplace companies: transactional sales model, often reliant on sub-contracted sales

or work force,
Hardware: and sales
upfront often subject to substantial
of equipment with littleecosystem third party
to no follow-on revenuecosts
80%

Hardware: upfront sales

Hardware/software blend:ofupfront
equipment with little
hardware saletoand
no software
follow-onsubscription
revenue
60%

Hardware/software
Social media blend: upfront hardware sale and software subscription
60%

40% Social media

40%

20%

20%

0%

Cloudflare

Fastly
Pinterest
Sonos
Zscaler
Zuora
Upwork
Smartsheet
Medallia
Datadog
Fiverr
Tenable
Peloton
Livongo
Slack
CrowdStrike
Dynatrace
Spotify
Pivotal
PagerDuty
Eventbrite
Dropbox
ArloArlo
Docusign
Zoom
Catalyst
UberUber
Lyft Lyft
Anaplan
Black
EverQuote
SurveyMonkey
0%

-20%
Fastly
Pinterest
Sonos
Zscaler
Zuora
Upwork
Smartsheet
Medallia
Datadog
Fiverr
Tenable
Peloton
Livongo
Slack
CrowdStrike
Dynatrace
Cloudflare
Spotify
Pivotal
PagerDuty
Eventbrite
Dropbox
Docusign
Zoom
Catalyst
Anaplan
Black
EverQuote
SurveyMonkey

Carbon

-20%
Health
Carbon
-40%
Health
-40%
-60%
softbank vision fund
-60%
softbank vision fund
-80%

-80% Bloomberg, Company financials, Stratechery.com, JPMAM. December 30 2019. The companies above are shown for illustrative purposes only. Their inclusion should not be
Sources:

interpreted as a recommendation to buy or sell. The use of the above companies is in no way an endorsement for J.P.Morgan Asset Management investment management services .
Sources: Bloomberg, Company financials, Stratechery.com, JPMAM. December 30 2019. The companies above are shown for illustrative purposes only. Their inclusion should not be
interpreted as a recommendation to buy or sell. The use of the above companies is in no way an endorsement for J.P.Morgan Asset Management investment management services .
This mixed bag outcome is part of a broader trend showing that diversified multi-sector IPO investing
since 2010 hasn’t
This mixed done much
bag outcome is partfor
ofinvestors. The latest
a broader trend study17that
showing we’ve seen takesmulti-sector
diversified two approaches. The first
IPO investing
is a portfolio
since that owned
2010 hasn’t 200 IPOs
done much for since 2010, with
investors. proceeds
The latest studyto
17
buy
we’ve each
seennew IPOtwo
takes sourced from selling
approaches. the
The first
worst performers.
is a portfolio that Since
owned inception,
200 IPOsitssince
relative performance
2010, has been
with proceeds flat each
to buy to thenew
market. The second
IPO sourced fromstudy looked
selling the
at relative
worst performance
performers. Since of IPOs since
inception, its 2010 assuming
relative a 2-year
performance has hold:
been flat median
the to IPO return
the market. The was 20%
second below
study the
looked
at relativeAverage
market. returnsofwere
performance IPOsbetter but still
since 2010 just matched
assuming market
a 2-year hold:returns, benefiting
the median from was
IPO return the 2%
20%ofbelow
IPOs that
the
delivered returns > 200%. A lot of IPO underperformance can be attributed to the healthcare
market. Average returns were better but still just matched market returns, benefiting from the 2% of IPOs that sector, the
largest issuing
delivered and>worst
returns 200%. performing
A lot ofsector in the US IPO market
IPO underperformance cansince 2010.
be attributed to the healthcare sector, the
largest issuing and worst performing sector in the US IPO market since 2010.
MA RK E T S
IP O
17
”What Matters for IPOs”, Goldman Sachs Global Strategy Paper, September 4, 2019.
17
”What Matters for IPOs”, Goldman Sachs Global Strategy Paper, September 4, 2019. 26
26
26
EYE
E Y E ON
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. MORGAN 2020
2 0 2 0OUTLOOK
Outlook
The prophets of the venture capital ecosystem (startup CEOs and venture funds that finance them) have
reached new cycle peaks regarding private companies with no profits. Similarly, IPO investors are applying the
highest price to sales ratios to tech IPOs since the late 1990s (valuations are still well below those levels but I’m
not sure how much comfort that is worth).
Private equity share of capital going to companies not Highest tech IPO price to sales since the late 1990s
categorized as profitable Price to sales ratio of tech IPOs
60% 20
Hundreds
Based on first close

50%
15
40% Based on offer price
30% 10
20%
5
10%
0% 0
1986
2008
1980
1982
1984
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2010
2012
2014
2016
2018
'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19
Source: Empirical Research Partners. 2019 data through September 2019. Source: Jay Ritter, University of Florida. Updated 2019 IPO statistics.
Here’s a related measure we’re watching. There’s a growing number of firms we refer to as “YUCs”:
Young Unprofitable Companies, which have negative net income, rapid sales growth and which have
been around for less than 5 years. I don’t think we will ever relive the lunacy of the late 1990’s, but as
shown below, some measures are getting there. The portion of US market capitalization made up of
YUCs is around one third of the 2000 peak, and the YUC share of total corporate spending on SG&A,
capital spending and R&D is even higher. Other notable stats: spending by YUCs accounted for 0.15%-
0.30% of US GDP growth in the last couple of years, and their demand for cloud services and digital
advertising amounted to 10% of Google, Facebook and Amazon revenue. In other words, if investors
tire of financing the YUCs, reverberations for large and mid cap tech service providers and the
US economy more broadly could be substantial.
Market cap of young unprofitable companies Spending by young unprofitable companies
% of total market cap % of total corporate spending on Selling, General & Administrative
7% Expenses, Capital Spending and Research & Development
Young unprofitable company: 5%
6% Negative net income in 2 of last 3 years Young unprofitable company:
Less than 5 years since IPO Negative net income in 2 of last 3 years
4% Less than 5 years since IPO
5% Annual revenues growing > 15%
Annual revenues growing > 15%
4% 3%
3%
2%
2%
1%
1%
0% 0%
1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015
Source: Factset, J.P. Morgan Asset Management. Q3 2019. Source: Factset, J.P. Morgan Asset Management. Q3 2019.
MA RK E T S
IP O
27
27
E Y E ON
EYE O N THE
T H E MARKET
. MORGAN 2020
2 0 2 0OUTLOOK
Outlook
[10] What is the most interesting breakthrough I learned about in 2019?
[10] What is the most interesting breakthrough I learned about in 2019?
Every year, I talk to enterprising people about the projects they’re working on. In 2019, the most interesting
Every year, I talk
breakthrough to enterprising
I learned about ispeople
relatedabout
to thethe projects
latest they’re working
achievements in stemon.cellInresearch.
2019, theDeep
most geothermal
interesting
breakthrough I learned
energy via plasma-bit aboutwas
drilling is related
a close to the latest
second 18
, but achievements
still too distantininstem
termscellof research. Deep geothermal
implementation.
energy via plasma-bit drilling was a close second18, but still too distant in terms19of implementation.
We spent a day with the New York Stem Cell Foundation Research Institute in October. Imagine this: you
We
walkspent
into aa clinic
day with the Newa York
and provide vial ofStem
bloodCell
or aFoundation
piece of skin Research
the sizeInstitute 19
of an applein October.
seed. Then,Imagine this: you
the remarkable
walk into ascientists
happens: clinic anduseprovide
yourasample
vial of blood or a piece
to create “blankof skin thestem
slate” size of an that
cells appleareseed.
an Then,
avatartheofremarkable
your own
happens: scientistswhich
genetic makeup, use yourare sample to create “blank
then transformed slate”
into any of stem
over cells that are an cells,
200 specialized avatarsuch
of your own
as heart,
genetic makeup, which are then transformed into any of over 200 specialized cells,
liver, pancreas, brain, etc. The following scenarios are now possible scientifically, and not just in the realm such as heart,
liver,
of thepancreas,
imagination: brain, etc. The following scenarios are now possible scientifically, and not just in the realm
of the imagination:
 You have a chronic genetic disease like amyotrophic lateral sclerosis (ALS), diabetes, multiple sclerosis or
 You have a chronic
Parkinson’s, genetic
and doctors wantdisease like different
to try out amyotrophic lateral sclerosis
treatments since you(ALS),
are notdiabetes, multiple
responding sclerosis
well to or
standard
Parkinson’s,
ones. Instead andofdoctors want to
bombarding youtryinout
yourdifferent
weakenedtreatments
conditionsince
withyou are treatments,
these not responding
theywell
can to standard
apply them
ones.
insteadInstead of dish
to a petri bombarding
with youryou
own in cells,
your weakened condition
since they will with these
carry whatever treatments,
disease theyfrom.
you suffer can apply them
If needed,
instead to a petri
researchers dishhundreds
can test with yourofown cells, since
different drug they will carry whatever
combinations, which woulddisease you suffer
typically from.
not be If needed,
possible in any
researchers canwith
practical sense test hundreds of different
an individual patient drug combinations, which would typically not be possible in any
 practical sense with an individual patient
You suffer from a condition like macular degeneration, which is to date incurable. Scientists transform your
 You
blanksuffer
slatefrom
stemacells
condition like retinal
into new macular degeneration,
cells whichreplace
which effectively is to date
theincurable. Scientists
dying ones transform
inside your your
own body.
blank slateyour
Similarly, stem cellscells
stem intocan
new beretinal cells which
transformed effectively
into hip replace
bone cells the dying
to replace ones inside
the need your own
for inorganic body.
materials
Similarly, your
for patients stem cells
suffering from canbone
be transformed
degeneration into hip bone cells to replace the need for inorganic materials
 for patients suffering from bone degeneration
You’re a scientist focused on diseases like Alzheimer’s, and have been confined to experiments on mice and
 You’re a scientist
other lab animals.focused on diseases
However, like Alzheimer’s,
these animals and have
do not develop been confined
Alzheimer’s to experiments
in nature, on mice
so the entire and
research
other
processlabis animals. However,
fraught with these animals
uncertainties and deaddo not
ends.develop Alzheimer’s
Similarly, diabetes in nature,
cures so theare
for mice entire research
not cures for
process
humans.is fraught
Instead, with
stemuncertainties
cells allow youandtodead ends. Similarly,
experiment diabetes using
with treatments cures an
for inexhaustible
mice are not supply
cures for
of
humans.
human cells Instead,
carryingstem
the cells allowFurthermore,
disease. you to experiment
you canwith
applytreatments using an
these treatments to inexhaustible supply of
a diverse population
human cells which
cell donors, carrying the disease.
is important Furthermore,
since you with
every individual can apply
a giventhese treatments
condition to arespond
does not diverse population
the same way of
cell donors, which
to treatment. is important
A potential relatedsince every by
benefit: individual with a given
testing human condition
cells instead does notscientists
of animals, respond the same
might be way
able
to treatment.
shorten theAdrug potential related
approval benefit:
timetable byby testing
3-4 yearshuman cells instead
and increase of animals,
the probability of scientists
success bymight
over be able
8 times
to shorten the drug approval timetable by 3-4 years and increase the probability of success by over 8 times
18
Ultra-deep geothermal energy. Standard utility-scale geothermal energy taps into steam or hot water at
temperatures
18
Ultra-deepofgeothermal
150°–200° Cenergy. which isStandard
brought to the surface,
utility-scale where its heat
geothermal is used
energy tapstointogenerate
steamelectricity through
or hot water at
temperatures
a steam turbine. of 150°–200° C which
Typical drilling is brought
depths to the meters
are 150-200 surface,below
wherethe its surface.
heat is used to generate
However, at 5-7electricity
kilometersthrough
below
athe surface,
steam there Typical
turbine. are geothermal resources
drilling depths of 400°-500°
are 150-200 C at
meters 200 bars
below of atmospheric
the surface. However, pressure
at 5-7where waterbelow
kilometers takes
a form
the calledthere
surface, supercritical fluid. Such
are geothermal fluids inoftheory
resources could Cdeliver
400°-500° at 200 10x more
bars power than traditional
of atmospheric pressure wheregeothermal
water wells,
takes
aand
formrival the power
called derived
supercritical from
fluid. nuclear
Such fluidspower plants.
in theory couldWe met 10x
deliver withmore
a company
power developing plasma-based
than traditional geothermal drill bits
wells,
that rival
and are designed
the powertoderived
reach temperatures
from nuclear of 6,000°
power C with
plants. Wethe
met goal
withofabeing
companyable developing
to drill to such depths. However,
plasma-based drill bits
its efforts
that are in their
are designed infancy,
to reach and their estimates
temperatures of 6,000°ofCplasma drilling
with the goal costs
of beingthatable
rise linearly with
to drill to depth
such (as opposed
depths. However, to
rising
its geometrically
efforts are in theirasinfancy,
with conventional drill bit techniques)
and their estimates have to
of plasma drilling be taken
costs with
that rise a giant
linearly grain
with of salt
depth (as until proven
opposed to
in more
rising than just field
geometrically studies.
as with A lot of promise
conventional drill bit as potential renewable
techniques) have to be baseload
taken with power,
a giantbutgrain
veryofearly
saltstage.
until proven
in
19 more than just field studies. A lot of promise as potential renewable baseload power, but very early stage.
NYSCF is a multidisciplinary research lab with 225 scientists and partnerships with the world’s leading universities
and
19
teaching
NYSCF hospitals. What research
is a multidisciplinary makes NYSCFlab with unique? Many academic
225 scientists researchwith
and partnerships institutions
the world’sare highly
leading driven by the
universities
needteaching
and to publish, which can
hospitals. Whatdeter fromNYSCF
makes researching high Many
unique? risk/non-traditional
academic research experimental treatments.
institutions are highlyInstead,
driven NYSCF
by the
can pursue
need themwhich
to publish, since can
it is deter
an independent non-profit
from researching high research institute that
risk/non-traditional relies on private
experimental donors.Instead,
treatments. Furthermore,
NYSCF
THROUG HS
the kinds
can pursueofthemexperiments
since it isthat
an NYSCF conducts
independent require research
non-profit a combination
instituteofthat
disciplines:
relies onbiologists, engineers,
private donors. computer
Furthermore,
BRE AK-
scientists,
the kinds of immunologists
experiments that and NYSCF
neurologists.
conducts Thisrequire
multi-disciplinary
a combination approach is what biologists,
of disciplines: allows them to reproduce
engineers, computerhigh
quality stem
scientists, cells on a vast
immunologists andscale, reducing the
neurologists. bottleneck
This which had
multi-disciplinary been hampering
approach stem cell
is what allows them research efforts.high
to reproduce
quality stem cells on a vast scale, reducing the bottleneck which had been hampering stem cell research efforts.
28 28
28
EYE 2020 OUTLOOK
E Y E ON
O N THE
T H EMARKET
 J.P. MORGAN 2020 Outlook
What is the foundation of these discoveries? The creation of induced pluripotent stem cells grown from adult
skin
Whator blood
is the cells20, of
foundation andthese
which supplant much
discoveries? of the of
The creation need for stem
induced cells obtained
pluripotent from grown
stem cells in-vitro from
fertilization
adult
(IVF/embryonic) sources. So far, stem cell research for chronic diseases is mostly taking place in multi-disciplinary
skin or blood cells , and which supplant much of the need for stem cells obtained from in-vitro fertilization
20 labs
like the one we visited. But the milestones are very promising so far:
(IVF/embryonic) sources. So far, stem cell research for chronic diseases is mostly taking place in multi-disciplinary labs
like
 theDrugone we visited. designed
combinations But the milestones are the
to slow down veryprogress
promising
of so
ALS far:
and to destroy AML (leukemia) cancer cells were
discovered using the process above, and are moving forward
 Drug combinations designed to slow down the progress of ALS and in clinical trials AML (leukemia) cancer cells were
to destroy
 Patients areusing
discovered now the
receiving stem
process cell treatments
above, for macular
and are moving forwarddegeneration in early trials
in clinical trials
 Patients
Stem cellare now receiving
treatments stemdesigned
are being cell treatments for macular
for Parkinson’s degeneration
patients to replaceinand
earlyrebuild
trials lost neurons
 Researchers
Stem are working
cell treatments on stem
are being cell treatments
designed that involve
for Parkinson’s the to
patients production of new
replace and blood
rebuild lostcells to combat sickle
neurons
 cell and other immune/metabolic disorders
Researchers are working on stem cell treatments that involve the production of new blood cells to combat sickle
 cell and
Cell otherfrom
samples immune/metabolic
patient tumorsdisorders
can be used to generate “organoids”, which are effectively living cancerous
 Cell samples from patient tumors can be
tissue that can survive indefinitely and be used
used for cancer treatment
to generate research
“organoids”, which are effectively living cancerous
Verytissue
early stage projects include studies of sensory neurons, obtained
that can survive indefinitely and be used for cancer treatment research and sustained through stem cell creation, with
the
Verygoal
earlyofstage
developing
projectsbetter
includenon-addictive treatments
studies of sensory for chronic
neurons, pain.
obtained and sustained through stem cell creation, with
There’s
the goalaoflong road ahead
developing for sufferers
better of chronic
non-addictive diseases
treatments forbeing studied,
chronic pain.given the time it takes to get new treatments
approved, the road
There’s a long time it takesfor
ahead forsufferers
new treatments
of chronicto diseases
propagate through
being the given
studied, healthcare system,
the time questions
it takes about
to get new whether
treatments
such treatments would be covered under different insurance plans, and questions about the pluripotent
approved, the time it takes for new treatments to propagate through the healthcare system, questions about whether stem cells
themselves, since there are reports in some experiments of tumor formation emanating from the
such treatments would be covered under different insurance plans, and questions about the pluripotent stem cells stem cells. Despite
the uncertainties,
themselves, stem cell
since there clinical trials
are reports in somenowexperiments
underway may with formation
of tumor the benefitemanating
of hindsight bethe
from seen as acells.
stem new Despite
frontier
in medical treatment that reduces mortality, disability and the economic costs associated with certain
the uncertainties, stem cell clinical trials now underway may with the benefit of hindsight be seen as a new frontier chronic diseases.
in medical treatment that reduces mortality, disability and the economic costs associated with certain chronic diseases.
The latest research on stem cell transplants to treat age-related macular degeneration (AMD)
Two latest
The patients with acute
research on wet
stemAMDcell and recent rapid
transplants visionage-related
to treat decline received a patch
macular of cells derived
degeneration from leftover IVF
(AMD)
embryos in one eye as part of a phase 1, open-label, safety and feasibility study. Results were
Two patients with acute wet AMD and recent rapid vision decline received a patch of cells derived from leftovermeasured in termsIVF
of
“visual acuity” (i.e, being able to read a standard LogMAR eye chart, which is the one with 5 block
embryos in one eye as part of a phase 1, open-label, safety and feasibility study. Results were measured in terms of letters per line),
and in reading
“visual ability
acuity” (i.e, measured
being able toinread
words per minute.
a standard LogMAR Botheyepatients improved
chart, which onone
is the bothwith
fronts within
5 block the first
letters per year,
line),
although both required post-procedure hospitalization to treat retinal detachment and adverse
and in reading ability measured in words per minute. Both patients improved on both fronts within the first year, side effects from
immunosuppression procedures (since IVF cells were used that were not derived from the patient).
although both required post-procedure hospitalization to treat retinal detachment and adverse side effects from Future stem cell
studies will involve a patient’s own pluripotent cells instead, eliminating the need for immunosuppression.
immunosuppression procedures (since IVF cells were used that were not derived from the patient). Future stem cell
studies will involve
Improvements a patient’s
in visual acuity own pluripotent cells instead, eliminating
Reading speedthe need for immunosuppression.
Number of letters read on standard LogMAR eye chart Words per minute read
Improvements in visual acuity
40
Reading speed
90
Number of letters read on standard LogMAR eye chart Words per minute read
35
40 80
90
30 70
80
35
25 60
70
30
50
60
20
25
40
50
15
20
30
40
10
15 Patient one 20 Patient one
30
5
10 Patient two
one 10
20 Patient one
two
0
5 0
0 50 100 150 200 250 300 Patient
350 two400 10 0 50 100 150 200 250 300 Patient
350 two400
0 Days after procedure 0
0 50 100 150 200 250 300 350 400
Days after procedure
Source: Nature Biotechnology, Cruz/Coffey et al, 2018. 0
Source: 50 Biotechnology,
Nature 100 150 200 et al,
Cruz/Coffey 2502018. 300 350 400
Days after procedure Days after procedure
Source: Nature Biotechnology, Cruz/Coffey et al, 2018. Source: Nature Biotechnology, Cruz/Coffey et al, 2018.
20
The importance of FDA-approved studies and treatments vs “Stem Cell Tourism”. There are reports of
adipose
20 and other stem
The importance cell treatments studies
of FDA-approved which are quite
and different from
treatments FDA-approved
vs “Stem stem cellThere
Cell Tourism”. studies,
are and which
reports of
THROUG HS
have been investigated by the New York Attorney General and other regulators for risks to patients. A study in the
BRE AK-
adipose and other stem cell treatments which are quite different from FDA-approved stem cell studies, and which
2017 Newinvestigated
have been England Journal
by theof Medicine
New showedGeneral
York Attorney substantial adverse
and other impactsfor
regulators from
riskssome unregulated
to patients. macular
A study in the
degeneration treatments, including complete blindness.
2017 New England Journal of Medicine showed substantial adverse impacts from some unregulated macular
degeneration treatments, including complete blindness. 29
29
29
EYE ON THE MARKET • MICHAEL CEMBALEST • J.P. MORGAN 2020 OUTLOOK
Acronyms
ACWI All Country World Index; AMEX American Stock Exchange; BEA Bureau of Economic Analysis; BLS Bureau of Labor Statistics; CBO
Congressional Budget Office; CC China Customs; CFLP China Federation of Logistics and Purchasing; CFO Chief Financial Officer; CRFB Committee
for a Responsible Federal Budget; CNBS China National Bureau of Statistics; E&P Exploration and Production; EBITDA Earnings before interest,
tax, depreciation, and amortization; ECB European Central Bank; EM Emerging Markets; FAANG Facebook, Apple, Amazon, Netflix, and Google;
FDA Food and Drug Administration; FRB Federal Reserve Board; FTC Federal Trade Commission; GBI Government Bond Index; GICS Global Industry
Classification Standard; GIPC Global Innovation Policy Center; HHS United States Dep’t of Health and Human Services; IBES Institutional Brokers’
Estimate System; IPO Initial Public Offering; ITIF Information Technology and Innovation Foundation; JPMAM J.P. Morgan Asset Management;
MSCI Morgan Stanley Capital International; NAHB National Association of Homebuilders; NBER WP National Bureau of Economic Research
Working Papers; NLRB National Labor Relations Board; NTU National Taxpayer Union; NYSE New York Stock Exchange; OECD Organisation for
Economic Co-operation and Development; P/E Price to Earnings; PBOC People’s Bank of China; PCE Personal Consumption Expenditure; PMI
Purchasing Managers’ Index; R&D Research and Development; RMB Renminbi; SG&A Selling, General and Administrative Expenses; SIFMA
Securities Industry and Financial Markets Association; USITC United States International Trade Commission; WTO World Trade Organization
Purpose of This Material: This material is for information purposes only. The views, opinions, estimates and strategies expressed herein constitutes
Michael Cembalest's judgment based on current market conditions and are subject to change without notice, and may differ from those expressed
by other areas of J.P. Morgan. This information in no way constitutes J.P. Morgan Research and should not be treated as such.
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MICHAEL CEMBALEST is the Chairman of Market and Investment Strategy for

J.P. Morgan Asset & Wealth Management, a global leader in investment management
and private banking with $2.2 trillion of client assets under management worldwide
(as of September 30, 2019). He is responsible for leading the strategic market and
investment insights across the firm’s Institutional, Funds and Private Banking businesses.
Mr. Cembalest is also a member of the J.P. Morgan Asset & Wealth Management
Investment Committee and previously served on the Investment Committee for the
J.P. Morgan Retirement Plan for the firm’s more than 256,000 employees.
Mr. Cembalest was most recently Chief Investment Officer for the firm’s Global Private
Bank, a role he held for eight years. He was previously head of a fixed income division
of Investment Management, with responsibility for high grade, high yield, emerging
markets and municipal bonds.
Before joining Asset Management, Mr. Cembalest served as head strategist for Emerging
Markets Fixed Income at J.P. Morgan Securities. Mr. Cembalest joined J.P. Morgan in
1987 as a member of the firm’s Corporate Finance division.
Mr. Cembalest earned an M.A. from the Columbia School of International and Public
Affairs in 1986 and a B.A. from Tufts University in 1984.
AMERICAS ASIA EUROPE MIDDLE EAST
Brazil Hong Kong France Dubai
Chile Singapore Germany
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Eye on the Market Outlook 2020

J.P. MORGAN PRIVATE BANK

J.P. Morgan Asset & Wealth Management

Ghosts of Christmas Past January 1, 2020

3.5% Service sectors LEAST exposed to manufacturing

Midwest +12% 10% 10%

200 40% Social media

1990 1995 2000 2005 2010 2015

1990 1995 2000 2005 2010 2015

[1] Why don’t I think there will be a US recession in 2020?

Lowest unemployment rate in 50 years Signs of a healthy US labor market

16% 2.5% 2.0%

Wages rising across all levels of income Household debt

Sharp upward revision in US savings rate Real consumer spending

Percentage of non-financial companies with elevated A spike in weakest link companies

Loans: high interest coverage and high leverage as well

enterprise fixed asset investment 9%

-4% Fiscal deficit plus 35%

-6% investment via local

1993 1998 2003 2008 2013 2018

P/E difference of most 50%

P/E difference of most 50%

Progressive Democratic Agenda

Recognize and enforce religious freedom

Hardware: upfront sales

40% Social media

Based on first close

GENERAL RISKS & CONSIDERATIONS

LEGAL ENTITY, BRAND & REGULATORY INFORMATION

© 2020 JPMorgan Chase & Co. All rights reserved. PB-19-DE-755

MICHAEL CEMBALEST is the Chairman of Market and Investment Strategy for

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