Investing For Life

JP Morgan - Admitted Wrong Prediction

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Publish date: Sat, 12 Dec 2020, 08:13 PM
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First, a few things JP MORGAN got wrong:

  • Expecting no recession in 2020. Heading into 2020, coordinated global monetary easing and the watershed “phase one” U.S.-China trade deal had breathed new life into the economic cycle. There were no obvious market or economic imbalances on the precipice of unwinding. We thought the runway was relatively clear (save for a few wildcards, like geopolitics and the 2020 U.S. election) for the economic expansion to continue well into its 11th year. 2020 had other plans. The COVID-19 crisis brought an exogenous (outside) shock to the economic system. It not only became the recession that no one predicted, but also the recession that was no one’s fault.
  • The degree of devastation and far-reaching impact of COVID-19. When news of COVID-19 first hit headlines in January as a rapidly spreading virus in China, we wrote that we thought the situation had a low likelihood of lasting impact. We even said that it would be unlikely for other countries’ containment responses to be as stringent as China’s…needless to say, we were very wrong. Eight months later, the world has seen over 30 million cases (and climbing), dramatic lockdowns across developed and emerging economies alike, and the deepest recession (across a variety of metrics) since the Great Depression.
  • Not believing in the equity rally, at first. For a while, we couldn’t quite wrap our heads around what the equity market was signaling—at the end of March, economic data was still really bad and corporate earnings prospects were uncertain at best, dire at worst. The mistake here was not recognizing earlier that equity valuations may have just been entering a “new normal,” given lower for longer interest rates globally. Come the end of April, we started to tune into the wide dispersion between companies within the index—dissecting the “market of stocks” rather than just considering the “stock market” as one unit. There have been very clear winners and losers throughout the crisis, and the largest companies in the U.S. stock market (many of which are tech or tech-adjacent) were extremely resilient.

But, hey! Here’s what we got right:

  • Believing in secular growth. Since 2018, we’ve been talking about digital transformation, healthcare innovation and sustainability as areas that stand to outpace the broader growth of the economy. We emphasized this view further in our 2020 outlook. The proof is in the pudding: Just look at market performance. Clean Energy, Technology and Healthcare have all outperformed year-to-date.
  • Calling the market bottom. We got this one mostly right. On March 23, we wrote that we were looking for three conditions that would tell us that the market bottom was in (and as chance would have it, that day actually happened to be the market bottom):
    • The number of daily new COVID-19 infections needed to decline.
    • The Fed needed to help fix the problems in fixed income and money markets, keeping the flow of credit to the real economy open.
    • Fiscal stimulus around the world needed to be large and well designed enough to cushion the economic fallout.

The gift of hindsight tells us 2 and 3 were spot on. While point 1 didn’t quite meet the bar (it’s still not totally clear that daily new global cases have peaked), we would note that new cases in Italy (which saw one of the worst outbreaks) did peak right as the market bottomed. We didn’t call the bottom or wave an “all clear” signal for risk assets, but we did recognize something had changed as stimulus flooded into the economic and financial system. In fact, we continued to advocate for companies exposed to secular growth trends, as well as traditional diversifiers such as gold. We even took some steps to add risk back to our multi-asset class portfolios in March, specifically through allocating to high yield bonds. Which brings us to our next point…

  • Advocating for high yield and choosing core bonds over cash. While we may have been a little late to believe in the equity rally, we started advocating for high yield back in March, while markets were finding their bottom. With high yield and investment grade spreads at their widest levels since the Global Financial Crisis, we thought valuations looked more compelling. Plus, central banks seemed likely to provide an important backstop. Indeed, U.S. high yield bonds have returned +27% from their lows. At the same time, despite historic uncertainty and volatility, we also advised against retreating to the safety of cash. Along those lines, you would have missed out on a remarkable rebound in risk assets if you’d done so.
  • Calling for a faster recovery than the Global Financial Crisis and Great Depression. While we were looking at some of the worst economic prints on record, we were calling for the recovery to be one of the fastest on record. The COVID-19 crisis is an example of a supply-driven recession (where the supply of goods and services was restricted, think: lockdowns) rather than a demand recession (where higher interest rates and overleverage result in lower spending and investment). In the past, supply-driven recessions have seen faster recoveries than demand-driven recessions—and that’s just what we’re seeing this time around.

Finally, where are we going from here? Overall, we’re optimistic. We think the backdrop is pretty supportive for investors, particularly over the medium term. Here are a few examples of what we expect for the future:

  • Megatrends are here to stay, and they’re accelerating. In our view, megatrends such as digital transformation, healthcare innovation and sustainability will continue to offer investors above-market levels of growth and potential returns. Consider that:
    • This year, we’ve seen more consumption, more work and more social activity pushed to the digital sphere. Cloud software company Domo, Inc. estimates that every minute, consumers spend an estimated $1,000,000 online, Zoom hosts roughly 208,000 participants in meetings, TikTok is installed over 2,700 times, WhatsApp users share over 41 million messages, Netflix users stream over 400,000 hours of video, and so on. And still, only 59% of the global population are active internet users!
    • In 2019—the halcyon days before the COVID pandemic—only 11% of all U.S. consumers had used virtual medical services (aka, telehealth). By May of this year, that portion grew to 46%, as patients sought virtual primary care visits with doctors during lockdown periods. Some recent estimates suggest that about a quarter of healthcare office visits and outpatient care could be delivered virtually, signaling huge potential for more efficient and cost-effective medical services in the future. 
    • Green energy generation costs have converged with (and in some cases, dropped below!) the cost of fossil fuels, and governments around the world are prioritizing the adoption of energy sources that are clean, economical, renewable and locally sourced. With this in mind, we think the earnings of global clean energy companies could exceed those of major benchmarks such as the S&P 500 over the next two years. 
  • Higher stock valuations are the new normal. As we discussed last week, there’s no denying that equities currently look expensive relative to their own history. But again, today’s investment environment is one defined by relatively slower economic growth and much lower interest rates. We expect that investors will be willing (or in some cases, forced) to pay up for future earnings growth for some time yet. The rules for what constitute “normal” valuations are being rewritten.
  • Investors will have to expand their toolkits to find yield. Global central banks are reiterating their intentions to keep policy interest rates at historically low (read: zero or negative) levels to support economic recovery. That makes it clear that cash-like instruments and traditional safe-haven bonds won’t offer investors the same degree of real capital preservation and income generation as they have historically. Tradeoffs may be necessary to find yield once afforded by core bonds: giving up liquidity to generate income from real estate investments, or taking a little more risk by moving into the upper-tier portion of high yield bonds or preferred securities, for example.

LESSON HERE TO ALL INVESTORS:
BIG BOYS MAKE MISTAKES TOO. OFTEN.


 
https://www.jpmorgan.com/securities/insights/what-we-got-wrong
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Discussions
Be the first to like this. Showing 9 of 9 comments

gemfinder

Bla bla bla

2020-12-12 20:18

EngineeringProfit

Intentionally one....

a)Expecting no recession in 2020

Because they needed to run first before you....hehe

2020-12-12 20:21

EngineeringProfit

Now they want to sapu bursa king at 3.50....hehe

2020-12-12 20:21

Morpheus61

In 2008, JP Morgan was the first in line for a bailout for their own misdeeds. Need we sat more ?

2020-12-12 20:27

gemfinder

Tis not history class. No need to talk history

2020-12-12 20:54

Hootkao00

wah gemfinder, you are here also ah??? u really want glove price to go down so much leh. i didnt buy any glove yet but now i know glove got some value ald. when a bit low then i will hoot kao kao!

2020-12-12 21:01

Morpheus61

gemfinder, why ? History not relevant ? Character is formed by making a habit of doing things.

2020-12-12 21:16

greedy44444

Gemfinder just a hater of glove... ignore him

2020-12-13 00:30

Albukhary

I think one of the biggest mistake the JP Morgan analyst done is they thought the current ASP has been price into the Quarter Report.

For everyone information, if you place an order with Top Glove today, the ASP maybe is USD90-USD100 per carton, which is equivalent to RM400 per carton (1000 pcs). But this order TopGlove will only fulfill by maybe Q4'2021. That mean, this RM410 per carton sales will only reflected in Q4'2021 or Q1'2022.

For current quarter Q1'2021, the revenue show in the report is reflecting the ASP during Apr-May'20 period, at that time, the ASP is around USD55 per carton, equivalent to RM220 per carton.

If you take Topglove current quarter revenue to calculate, it would be RM4,759,253,000 / 21,250,000 carton* = RM223 per carton.

*21,250,000 carton is derived from 85bil pcs / 4 quarter / 1000 pcs per carton.

2020-12-13 00:31

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