In its latest deep dive into the markets, J.P. Morgan provides a detailed insight into the state of equities, fixed income, and both the US and global economy. In equities, they highlight how profit margins are coming under pressure as a result of higher wage, interest, and raw material costs. Coming out of the financial crisis, the main driver of EPS growth was margins. Over the course of the business cycle this has shifted much more towards revenue growth and buybacks. While emerging markets tend to trade at a discount to US equities, they are currently at one of their cheapest points in recent history – 0.5x Price to book.
In fixed income, J.P. Morgan highlight how corporate debt has continued rising, reaching over $10tn whilst at the same time dealer inventories have fallen sharply since the crisis, meaning risks of low liquidity in adverse conditions. Also, Baa rated bonds, the lowest investment-grade bond credit rating in the investment grade index, are near all-time highs. At the same time, the duration of the investment-grade corporate credit universe duration has also risen meaning that investment-grade corporate bonds are more sensitive to movements in interest rates.
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