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“What’s about to happen is a huge wave of infrastructure investing,” said Michael Cembalest, JP Morgan’s Chief Investment Officer and the morning keynoter at the JP Morgan technology conference in Boston, which ends today.

For that reason, the bank has been putting money into technology and industrial stocks. Cembalest made the case that the trough in equity markets has happened, and that those touting dire things to come are Cassandras.

As proof, he noted that earnings in Q1 were up 11% excluding financials, showing that this market slump is a crisis of the banks, and specifically not a broad-based earnings slump like that of 2001. “2001 was a broad-based earnings decline. This recession is a financial collapse,” said Cembalest.

The banks’ mistake was that they loaded up on assets just as all other sectors were “getting religion” and cleaning up their balance sheets. The monoline insurers such as MBIA (MBIA) are the poster children of this recession, with 1% equity and trillions in complex structured credit assets that they couldn’t handle. “The banks went crazy: They drove up their assets relative to their equity.”

Non-financials are in good shape from a balance sheet perspective, and valuations for equities broadly speaking are low, Cembalest noted, at around 17x to 19x for technology stocks. Relative to where inflation is, valuations are low. You only get much lower valuations on stocks when inflation is 6% or 7%. The message: as long as inflation stays where it is, it’s not likely valuations are getting much cheaper on tech. (Cembalest expects a devaluation of the Euro and a rise in the US dollar and various Asian currencies as countries realize they face inflation pressure as they keep printing money.)

Cembalest sees a global infrastucture boom to solve some very basic problems. Fully a third of rice in Asia rots because it can’t get to market, Cembalest observed.

“There’s evidence that foreign central banks know that productivity leapt in the US in the five years after the completion of the interstate highway system. They know they can make some good investments in infrastructure.”

More specifically, “China is planning on spending a trillion dollars on basic transportation. We went and bought Chinese cement companies.”

So, Morgan is delving into tech stocks and Chinese cement makers, among other industrial stocks. “Somewhere in there, there are some promising implications for new technology.”

Cembalest closed by noting the diminished position of the US in the world.

There are a handful of countries in Asia whose GDP combined is more than the US. This is the first time in a long time that the US represents less than 50% of global market capitalization.
Source: The New Wave of Infrastructure Investing - JP Morgan