Cracks are emerging in risky investments warns JPMorgan

High valuations and underperformance are potential pitfalls for investors in 2020

Cracks are emerging in risky investments warns JPMorgan
Steve Randall

Among the flood of investment outlooks for 2020, the private bank division of JPMorgan is warning of a headwind from risky or poorly-underwritten investments.

In its outlook for the year ahead published this week, the bank says that high valuations have been “on the high side for a while” driven by easy access to bank money but there has been underperformance in some sectors, including tech IPOs. Although it notes that this is partly due to firms which claim to be tech firms but lack some critical attributes.

The report says that investors are becoming “more discerning about risk and cash flow fundamentals.”

Overall, the outlook sets a positive tone for 2020 with the global economy set to grow – especially in the US – and central bank easing supporting expansion for the manufacturing sector where data from US and China is already showing improvement.

However, international trade and investment issues will continue to cause concern even after a phase 1 US-China deal. These are likely to include further tightening of access to markets for some sectors and disputes regarding restrictions and taxation in others, such as some EU countries’ plans to introduce specific taxes targeting the (mostly US-headquartered) large tech firms.

Despite returns for investors in equity markets of 7-10% in 2020, JPMorgan says that there are risks to the US economy if inflation rises to a point where the Fed may reconsider its rate cuts; and any post-election changes which mean higher corporate taxes, etc.