Month: September 2024

In a recent note to clients, JPMorgan delved into the relationship between economic growth and long-term equity returns, with a focus on developed markets (DM) and emerging markets (EM).

In developed markets (DM), JPMorgan finds a clear link between economic growth and equity returns. A 1% increase in long-term real growth is associated with roughly 3% higher equity returns on average.

This boost comes primarily from higher earnings growth, with additional contributions from increased valuations and currency appreciation.

“About half of the return impact of higher growth in DM comes from higher earnings growth,” JPMorgan states. “Slightly less than half comes from higher valuations. The rest is from currency strengthening.”

Emerging markets, however, tell a different story. Here, the connection between economic growth and equity performance is much weaker. JPMorgan points out that many EM equity markets are not as closely tied to their domestic economies as those in developed markets.

For instance, EM stock market capitalizations are often just a fraction of GDP, compared to a much larger proportion in DMs. As a result, JPMorgan’s research finds “no relationship between forecast growth and actual returns” in emerging markets, challenging the assumption that faster-growing economies should deliver better stock market returns.

The report also addresses the practical challenges of using economic growth as a predictor for equity returns. Long-term growth forecasts are notoriously difficult to make accurately, and JPMorgan notes that there’s often a significant gap between forecasted growth and actual returns.

“We see no relationship between forecast growth and actual returns. Actual returns are also unrelated to recent past growth,” the report emphasizes.

Despite this, the bank suggests that investors with strong convictions about a particular country’s growth prospects might still consider incorporating these views into their investment strategies, though with an understanding of the risks involved.

JPMorgan’s analysis underscores that while economic growth can be a useful indicator in developed markets, it’s far from a guaranteed predictor of equity performance, especially in emerging markets.

The takeaway for investors is to approach growth forecasts with caution and to be mindful of the broader factors that drive market returns.

“Being mindful of the difficulties forecasting long-run growth, the results suggest it would still be reasonable for an investor to incorporate any high conviction views about growth or growth differences into their asset allocation process.”

As the U.S. approaches another presidential election, investors are naturally curious about how the outcome might affect the markets.

However, Morgan Stanley analysts suggest that the business cycle, rather than the election, will have a more significant impact on market behavior.

Morgan Stanley said in a note to clients on Monday that while election years are often filled with speculation and predictions, the historical impact of elections on markets is less clear.

“Our cross-asset strategy team’s study of the run-up to past elections shows no clear pattern of market behavior in election years, even when screening for different election and macro conditions,” the bank stated.

The uncertainty surrounding the election, especially in a polarized electorate, is said to further diminish the likelihood that investors will base their near-term strategies solely on electoral outcomes.

In particular, Morgan Stanley highlights that specific sectors could see more pronounced post-election impacts based on the differing policies of the two major parties.

For instance, they state that energy and telecom might struggle under the Democrats’ plan to extend tax breaks, while clean tech could benefit from sustained appropriations under the Inflation Reduction Act.

In addition, the bank says the U.S. Treasury yield curve and the U.S. dollar are also areas to watch. A Republican win, for example, could lead to higher tariffs, potentially driving a steeper yield curve as shorter-maturity bond yields decline.

Morgan Stanley says the U.S. dollar, often a safe haven, might strengthen if former President Trump wins, despite his criticisms of a strong dollar.

They believe this could occur due to potential tariffs and heightened geopolitical uncertainty, which might lead to more dovish central bank policies overseas.

While elections generate headlines, Morgan Stanley believes that the business cycle’s dynamics will play a more critical role in shaping market trends in the months ahead.

Investing.com The European Central Bank (ECB) has kept interest rates at 4% since September 2023, said analysts at Deutsche Bank Research in a note.

“In June the ECB initiated the easing cycle with a 25bp cut. Our current baseline has the ECB cutting rates twice more in 2024, with 25bp cuts in September and December, and a terminal rate in a landing zone of 2.00-2.50% later in 2025 or early in 2026,” the analysts said. 

To facilitate quicker and more substantial rate cuts, the ECB needs to navigate several critical conditions.

Firstly, the ECB’s ability to cut rates rapidly hinges on its perception of medium-term inflation risks. The ECB is particularly concerned with the possibility of inflation undershooting its 2% target in the medium term. 

This concern is influenced by various factors, including the risk of a hard-landing for the economy and the stability of inflation expectations. 

Analysts at Deutsche Bank Research note that while the risk of a hard-landing has increased, it is not yet a foregone conclusion. 

Weaker labor market conditions and potential fiscal tightening could heighten these risks. 

Currently, there is some evidence of a softening labor market, with a composite employment PMI falling below 50, yet this has not yet translated into significant job losses or reduced wage pressures. 

The ECB will need to see clearer indications that labor market weakness is affecting wage growth. 

Moreover, fiscal policy expectations, including the withdrawal of energy shielding measures and the reactivation of fiscal rules, could further dampen economic recovery, influencing the ECB’s decisions.

The ECB’s stance on inflation being transitory or persistent is another crucial factor. The bank initially hiked rates rapidly in response to unexpected inflation, and to reverse course as quickly as it hiked would require a belief that inflation is now transitory. 

Given that inflation remains above target and there is no immediate sign of a dramatic decrease in inflation metrics, the ECB is unlikely to cut rates as swiftly as it raised them. 

Deutsche Bank Research flags that current inflation expectations, though slightly lower, are still above levels that would typically prompt significant easing. Without a significant drop in these expectations, the ECB may be hesitant to accelerate rate cuts.

The concept of the neutral rate also plays a significant role in the ECB’s policy decisions. When the ECB initially hiked rates in 2022, it aimed to return to a neutral level of about 1.50-2.00%. 

With current rates at 3.75%, reducing to a neutral level implies further cuts. Analysts suggest that if the ECB identifies the neutral rate as being around 2.00-2.50%, it could justify more rapid rate reductions, particularly if inflation risks diminish. 

The bank’s previous experience with rapid hikes when rates were far from neutral suggests that it could also cut rates quickly if necessary.

Lastly, the current policy stance could be considered counterproductively restrictive, which might prompt faster rate cuts. If financial conditions were to tighten sharply or if credit conditions deteriorated significantly, the ECB might respond more aggressively. 

However, recent data indicate that financial conditions are not currently tightening in a way that would necessitate immediate action. 

Analysts at Deutsche Bank observe that while real interest rates have been rising, there is no clear evidence that the current policy stance is excessively restrictive.

Deutsche Bank Research suggests that while the market currently anticipates modest rate cuts in September and December, there is room for a more aggressive approach if downside risks become more pronounced. 

The ECB will remain attentive to evolving data and broader economic conditions. Any shift towards weaker inflation and growth could prompt faster rate reductions.

Dell may be positioned to capitalize on recent challenges faced by Super Micro Computer (NASDAQ:SMCI), Evecroce ISI analysts suggested in a Wednesday note.

With the competitive landscape for AI servers intensifying, Dell Technologies Inc (NYSE:DELL) stands to gain from customers seeking alternative suppliers, especially in the context of ongoing supply chain diversity and service capabilities.

Evercore highlights that Dell is uniquely positioned to gain market share in the AI server space, particularly as key customers, such as CoreWeave and various companies associated with Elon Musk’s companies, are dual-sourcing their production across both Dell and SMCI.

The firm analysts believe that Dell remains “a logical partner for customers who look for better/different supply chain diversity and crucially, a strong services offering through the deployment lifecycle,” analysts wrote.

Evercore projects Dell’s AI server revenues to exceed $8 billion this year, and surpass $10 billion in 2025. The focus for Dell, however, extends beyond just revenue growth; the company is also emphasizing the importance of maintaining acceptable EBIT margins and cross-selling various solutions, including networking, storage, and services, to its customer base.

The AI server market itself is experiencing robust growth, reaching approximately $30 billion in 2023, driven by the adoption of accelerator-based servers that utilize parallel processing.

Looking ahead, Evercore projects the market to grow at a compound annual growth rate (CAGR) in the mid-to-high teens, potentially reaching over $56 billion by 2027. Growth is expected to be led by tier 1 hyperscalers and tier 2 cloud service providers in the near term, with enterprise AI adoption contributing to the longer-term expansion.

Dell’s advantage in this competitive market is further bolstered by its comprehensive service offerings, which include engineering support, management, maintenance, and financial services.

Analysts also emphasize that “services related to AI-server deployments (co-design, installation, and maintenance, etc.) is a key reason why Dell is winning business in both tier-2 and enterprise customer cohorts.”

Moreover, as the customer mix shifts from tier-2 cloud service providers to enterprises and corporate customers, Dell’s ability to attach services to its hardware offerings is expected to contribute to margin accretion – a strategy seen as a key factor in Dell’s continued success in the AI server market.

Evercore maintains its “Outperform” rating on Dell, with a target price of $140.

Driven by AI demand, the company’s shares surged more than 43% this year, outperforming the broader market.