The US equities remain the most attractive globally despite a recent selloff, as company earnings remain strong and the trade war rhetoric between the US and China hasn’t dented growth prospects yet, according to JP Morgan Private Bank.
While a faster-than-expected pickup in inflation and interest rates might pose a risk to the growth of corporate earnings down the road, the economic outlook, so far, looks good and results of US companies on the S&P 500 index are expected to increase about 20 per cent in 2018, said Steven Rees, managing director at the US bank, who also oversees its Middle East operations. The private banking arm of the lender expects S&P 500 to end the year higher, barring any escalation in the trade war.
"We are telling clients to be patient, thoughtful and to try and separate between the fundamentals of the world economy and the equity markets versus a lot of noise that is impacting the market and causing it to be volatile," Mr Rees told The National in an interview on Wednesday.
“Potential escalation of the China-US trade war, if you will, does pose a bigger threat. What has been talked about, so far, I think is minimal [in terms of impact] if it’s actually implemented on the US businesses. The fear, the market has, is that this is the start of further escalation.”
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Global stocks, which reached record highs in January, plummeted nearly 6 per cent on aggregate in the first week of February on fears of a quicker pace of US Federal Reserve rate tightening, amid rising inflation and higher bond yields. The drop was exacerbated by quant trading strategies and exchange traded funds that track volatility.
The turmoil was sparked specifically by a strong US labour report on February 2, which investors took as a sign that the Fed would soon bring to a close, the longest era of cheap money in the country's history that has helped prop up global asset prices. Since then, trading in stocks has been choppy as the US and China continue to threaten each other with tariffs.
The volatility, Mr Rees said, is expected to continue.
“It’s growing pains with the normalisation of interest rates,” he said. "The job report showed there was a pick-up in inflation and I think the market had a hard time digesting it.”
The banker said that the valuation of the S&P 500, which is trading at around 16.5 times the earnings, is more or less in line with the historical average, with the index neither being expensive nor cheap. However, the best value lies, particularly, in the healthcare sector, financial services firms and some of the technology companies, he noted.
Mr Rees is upbeat about the JP Morgan's private banking business in the hydrocarbon-rich Middle East where higher oil prices are helping to create new millionaires. Dubai’s rising status as a global financial hub is attracting rich families to set up in the emirate to manage wealth, which is also good for private banking business.
JP Morgan Chase as a whole, especially its equity and investment banking divisions, has been beefing up its presence in the region, particularly in Saudi Arabia, he noted.
Sjoerd Leenart, the bank's regional chief and global head of corporate banking, in February said that the lender is bolstering its business in Saudi Arabia. It is adding new services and hiring staff in anticipation of increased foreign investment flows into local equities, as the kingdom vies for emerging market status amid efforts to radically transform its economy, he told The National at the time.
