At the end of the day working from home along with e-commerce are positive for the economy: Strategist

Ben Mandel J.P. Morgan Asset Management Global Strategist joins the On the Move panel to discuss earnings and the latest in China’s economic growth.

Video Transcript

JULIE HYMAN: Let's put it all together with Ben Mandel. He is JP Morgan Asset Management Global Strategist. He's joining us from New York. And, first of all, I want to talk to you about earnings, Ben. Because I know that you, like many folks who follow the market, are watching the forecasts.

It's early on yet, but what's the tenor of what we're hearing thus far? You have Johnson & Johnson, on the one hand, raising its forecast. But then you have, for example, some of the other banks that are saying maybe the rest of the year is gonna be a little rocky.

BEN MANDEL: Yeah, thank you. I think that that guidance is absolutely key, and, in fact, maybe even more important than the contemporaneous data that we're seeing.

I mean, we had some reminders, both in the international data and the US sort of domestic demand-oriented data today, that we are in the midst of a strong bounce in growth. I don't think that's that controversial at this point.

But where do we end up in six months time, in 12 months time? How are the losses associated with this pandemic, the lasting behavioral changes apportioned across the different stakeholders in the economy? We're still very much figuring that out.

I think banks, you know, for their part have some portion of those losses, which has been showing up in the bank earnings numbers, and also the loss provisions. But, again, those are forecasts for the future.

And something that might dull sentiment, even as the underlying fundamentals, is an early cycle economy where you'd like to be leading into risk here.

ADAM SHAPIRO: Ben, it's Adam. I'm curious about something you pointed out. And I'm going to use the word deflationary. You don't. But it sure looks that way. When you talk about this new world we're in is going to be, perhaps, long lasting. The work from home world.


ADAM SHAPIRO: And it's having a-- it's putting pressure on wages, perhaps even pushing them down. Why is it not deflationary?

BEN MANDEL: Well, at the end of the day, working from home-- along with e-commerce and other technological innovations-- are positive productivity shocks for the economy.

And what those are are positive for real growth but tend to be disinflationary, in the sense that they're holding down prices. Through wages, as you mentioned, through other costs. That's just kind of the textbook definition of a productivity shock, for which working from home and e-commerce are the leading edge here.

And so I think that what that does is, in a sense-- you know, we can't overlook the fact that that's good news at the end of the day. Higher productivity is good. I think it's a bit of a headache for policymakers, who are already struggling to move inflation back to normal levels, especially with rates stuck at the zero lower bound.

And so, you know, if inflation is everywhere and always a monetary phenomenon, it's gonna be a challenge for central banks to do that in the coming years, where it's most likely gonna be the case that rates are pinned.

JARED BLIKRE: Hi, Jared Blikre here. Want to shift gears to China for a second. The Shanghai Composite coming off its worst day in about five months on some weak retail data in China.

But just a week or two ago, we had this huge rally in Chinese stocks, and that was largely predicated on the government getting behind and saying, buy stocks. We know the stock market is heavily correlated with margin debt.

Does any of this matter? Is the China story necessary for them to reopen first so the world-- the rest of the world can benefit from that experience and also at least have one pocket of growth?

BEN MANDEL: I'm inclined to see China as a template for what's gonna happen elsewhere, and also in a positive sense.

If you were to say several months ago that China would lose as much as it did off of GDP in the first quarter and pretty much make it back in its entirety in the second quarter, I think that would have been just beyond belief. But that's, in fact, what has happened.

So while we think the-- maybe that tells us something about the extent of the bounce and the shape of it. I mean, this is clearly a V, even in some of the sectors that are lagging.

But, you know, where we're gonna see different differentiation towards the end of the year is where growth starts to-- you know, either through differential fiscal policy, where we see that's maybe slowing in the US faster than elsewhere and decelerating in terms of job gains.

Those are the areas of differentiation which I think will come into focus towards the end of the year. So I think, insofar as we're positioned, we like international regions. So we're overweight emerging markets, overweight Europe.

We're not quite underweight the US as the high quality market. But part of that story is those growth differences that we see emerging over the course of the next few months or quarters.

DAN HOWLEY: Hey Ben. I kind of want to ask, what kind of template, then, can the US learn from China, seeing the growth that they've returned to? What can we take with that for us?

BEN MANDEL: Well, you know, China and the US are obviously very different mark-- different economies structurally. The Chinese economy is much more geared towards goods than services. Whereas if you look at the US GDP and US employment, it's 70% or 80% services.

And so I think this is telling us something about the fact that global goods demand is gonna come back very quickly, and economies geared towards that demand are gonna do relatively well.

So that's-- you know, there's nothing we can learn from that beyond the fact that those compositional differences are gonna drive overall growth differences and perhaps earnings as well. And so that's part of that international diversification story, which we think has pretty firm roots.

JULIE HYMAN: Ben, I want to circle back to the work from home theme and how it relates to China versus US or US versus other countries. Because it feels anecdotally like the work from home theme is stronger in the west, you know, especially in non-manufacturing based economy.

So how are you thinking about how it's gonna affect regions around the world and how that then affects your investment thesis?

BEN MANDEL: That's right. I mean, that's a really interesting point, which is that those structural differences between China and the US also apply to some of the positive innovations, in terms of technology that have come out of the pandemic.

And so we come up with our own estimates of how many people can work from home in the global labor force by region. And the way we do that is think about, what are the features of the economy that make it conducive to working from home?

And so that's, you know, internet connections, to be sure. That's the services orientation of the economy, which tend to have higher working from home prevalence. It's education. After all, working from home is a skill-biased technology, which is gonna be more prevalent in places with higher human capital.

And demographics, also, to some extent, where younger generations might be more amenable. But when you put those all together, developed market economies all have very high capacity to work from home. In the high 30s.

And we estimate overall about 30% of the labor force in developed market economies is able to work from home, versus emerging markets where it's more 20% to 25%.

And so I think that's-- you know, in the near term, that's a benefit to those developed market economies because there's the flexibility to deal with the pandemic by shifting around the location of production and work. In the long term, I think that's a convergence story for emerging markets.

You know, we-- you know, over 10 to 15 years, you'd expect emerging market growth to be stronger, in part because they're converging towards that technological frontier. And so, you know, near-term challenge, but long-term convergent story for EM.

JULIE HYMAN: Interesting. All right. Ben Mandel, good to see you. JP Morgan Asset Management Global Strategist. Be well.

BEN MANDEL: Thank you.

JULIE HYMAN: Thank you.