Contested US election is biggest market risk - JP Morgan
A contested US election, renewed trade uncertainty and a Covid-19 vaccine delay are risks for equities as markets head towards year-end, JP Morgan said.
In a note on equity strategy the investment bank said markets were complacent about potential risks and that European stocks would not increase much by the end of 2020.
The biggest potential risk is a disputed US election along the lines of the recount in 2000, JP Morgan said. This could lead to legislative paralysis when fiscal support is needed for the economy. Commentators have said Donald Trump could reject a tight election result for his rival Joe Biden.
US opinion polls suggest scepticism towards China has taken over both political parties and that both Trump and Biden could seek to be tough on China in the presidential debates, fuelling concerns over trade relations, JP Morgan said.
A delay or setback to a Covid-19 vaccine is a further risk to confidence, especially given the "omnipresent expectation that a vaccine will be successful in October or November, the bank added.
Additional risks according to the bank are:
- Challenging market technicals including high concentration risk and low short interest. Value has resumed underperformance against momentum in line with stuck bond yields and the lower oil price.
- Fundamentals could soften if unemployment increases and Covid-19 infections increase, hurting the economy. Other risks include a fiscal cliff, policy execution and premature withdrawal of government support.
- Credit risk as defaults increase - residential and corporate loan delinquencies have increased sharply.
- The US dollar strengthens significantly, the oil price falls and inflation breakevens reduce
- Geopolitical risks of Brexit, Russia, Iran and others. Brexit is capping the value of the pound, helping JP Morgan's upgrade of UK stocks.
"We do not think that any of the above risks should necessarily be seen as a clear base case, but the potential is that some of them might be realised," JP Morgan analyst Mislav Matejka wrote in a note to clients.
"This, together with the rather complacent market sentiment, has been behind our view over the past three months that SXXP will be consolidating, and we expect SXXP to remain rangebound into year end.
"We think that US stays the regional outperformer and that one should not extrapolate recent profit taking in growth vs value, as bond yields will likely remain stuck."