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JP Morgan: US Tech And Healthcare To Outperform
Aspire, Hot Picks | 11 May 2015
By: Lim Si Jie
Articles (169) Profile

The US economy is seemingly moving smoothly with employment, consumption, housing, spending and investment generating trend growth of about three percent.

The increase in aggregate labour incomes and the rising number of workers employed are signs of things getting back to normal again. Rising real disposable income at three percent and a series of ISM employment surveys close to its highest level in the last 15 years all point towards an economic expansion.

Discharge Of Credit Records Brings Optimism

Slower home-buying has resulted in the lowest residential rental vacancy rate in 20 years.  According to JP Morgan, slow residential mortgage activity appears to be the “consequence of restrictions on servicing transfers, more complex and costly Federal and state servicing guidelines, and narrower safe-harbour provisions.”

However, it still looks optimistic for the next couple of years. As per the Federal Fair Credit Reporting Act, defaults are generally discharged from credit records after seven years. If so, the first wave of defaulters will soon be able to make loans without their historical credit defaults affecting the underwriting process. This will continue to drive the consumer story in the US.

Fed Interest Rate Decision Hinges On Labour Market

JP Morgan notes that the other big question revolves around “how much damage was done” to the labor market during the recession, and whether “wage inflation will show up faster than during prior cycles.”  The high job opening rate relative to unemployment implies an increase in the “structurally unemployed.” However, the Fed might have to hike interest rates if wages start rising too fast, even before it manages to re-engage labour market dropouts.

Earnings Growth Picking Up

2013 was a great year for US equity markets, but not so for earnings. Earnings and revenue were almost stagnant that year. Earnings growth only began to pick up in 2014. Based on manufacturing survey signals, S&P 500 earnings growth will range between seven and eight percent in 2015 after considering drags from a stronger dollar and declines in energy sector earnings.

While profit margins may decline as labour costs continue to rise from depressed levels, current margins also reflect structural improvements in how US firms are being run. These can be clearly seen through the steady decline in labour costs and capital spending relative to shipments over the last 25 years. As such, JP Morgan stays certain that the fall of US firms “will not happen In 2015.”

Technology And Healthcare To Outperform Market Again

The Price/Earnings (P/E) ratio on the median stock is approaching its historical limits for a mid-cycle period.  JP Morgan expects “limited P/E expansion in 2015.” Just like in 2014, equity market returns will be in line with earnings growth.  JP Morgan believes that the technology and healthcare sector will outperform the S&P 500 again this year.

Si Jie is no stranger to investing having started his journey at a young age. He is heavily influenced by acclaimed investors such as Benjamin Graham, Peter Lynch, and John Rothchild.

Please click here for more information about this author.


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