Threading the Needle: Where Markets May Be Mispricing Trade Risk
1. Domestically focused European corporations
As tariff uncertainty grows, markets that are relatively immune become more attractive. Nearly 50% of European equity revenue comes from within the region, meaning that those revenues are relatively more insulated against fluctuations in external trade.
The revenues sourced within the region become more important when you consider that, for the first time in a long time, Europe is becoming a domestic growth story. Germany’s 500 billion euro fiscal stimulus package is significant, exceeding 1% of GDP. For perspective, that’s larger than the U.S. fiscal response amid the COVID-19 pandemic on a relative GDP basis.
We think the boost to growth could lead to sustainably higher multiples for European equities toward 14.5 times forward earnings from about 14 times now, which would still represent an approximately 30% discount relative to current U.S. valuations.
2. Municipal bonds for tax-sensitive U.S. buyers
Market concerns over their tax-exempt status is currently driving the cheapening in municipal bonds.
Municipal bonds are debt securities issued by states, cities or other local government entities to fund public projects.
The interest income from these bonds is typically exempt from federal income tax (the federal government doesn’t tax municipalities, and vice versa). This tax exemption makes municipal bonds attractive for individuals in higher tax brackets.
The U.S. government is seeking ways to limit its deficit while passing an extension of the Tax Cuts and Jobs Act. The House of Representatives voted to adopt the Senate-amended fiscal year (FY) 2025 concurrent budget resolution, allowing for legislation to add $5.8 trillion to deficits through FY 2034. Given that the government only misses out on about $30 billion per year in revenue by not taxing municipal bonds, changing that policy wouldn’t make a dent.
3. Private equity secondaries
Dealmaking activity (M&A and IPOs) has been more muted than expected coming into the year, in part given uncertainty post-“Liberation Day,” still elevated rates and equity market volatility. The higher probability of prolonged uncertainty has created a cloudier outlook on the pace of a dealmaking recovery in the near term.
Secondaries are transactions in which investors buy and sell existing stakes in private equity or other alternative investment funds. Secondaries generally offer investors portfolio diversification by allowing them to acquire interests in existing funds across different vintage years and managers, mitigating risks associated with single-fund investments. These transactions also often come at a discount to the NAV. These factors combined present the opportunity for secondaries to generate attractive risk-adjusted returns.
Rick Barragan is the Managing Director,
Los Angeles Market Manager, for J.P. Morgan Private Bank.
[email protected] | (310) 860-3658
privatebank.jpmorgan.com/los-angeles
Source: “Threading the needle: Where markets may be mispricing trade risk” by Jacob Manoukian, U.S. Head of Investment strategy, April 25, 2025
