Just another correction, or the path to Trump's recession?
• Our economists’ view all year has
been that the global economy would definitely bend due to tariffs (i.e. growth and profits would slump to
a sub-trend pace), but that it wouldn’t break (enter a recession), for three reasons: global central bank
easing plus selective fiscal stimulus (mainly from EM Asia rather than the US or Europe); lack of
significant US private-sector imbalances in aggregate relative to conditions that typically precede
• Our Global Equity Strategists have had a longstanding preference for the US over Eurozone equities, but
are reversing this call now. Eurozone has underperformed the US by as much as 25% in USD terms over the
past 18 months and it is underowned - with 20% of AUM outflows since Mar ’18. Eurozone PMIs are weak, but
the team points to an improving M1 in the region, which tended to lead PMIs by 2-3 quarters. The sharp
narrowing in peripheral spreads calls for the catch up of Euro equities. In addition, any increase in
fiscal stimulus speculations could be a help for the sentiment in the region. Finally, any sustained
rotation in market leadership, away from Growth and into Value, would be a help for Eurozone, given its
Value tilt. Disorderly Brexit is clearly a risk to this view. However, JPM base case is that the current
deadline will be pushed out to Jan-Feb with early elections likely and one should not ignore the
possibility that Boris Johnson gets his deal through in October. This would be very bullish for UK
domestic stocks, and for the GBP, but the stronger FX would likely take away a lot of the upside from UK
stocks. Eurozone equities on the other hand are a big potential indirect beneficiary.
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