Download Global Asset Allocation Views - JP Morgan Asset Management

Global Asset Allocation Views
Themes and implications from the Multi-Asset Solutions Strategy Summit
4Q 2016
AUTHOR
IN BRIEF
• The growth outlook is brightening a little, but this carries with it fears of a hawkish turn
in policy. In our view, these concerns are overstated. We expect the Federal Reserve
(Fed) to raise rates only glacially, in turn keeping the U.S. dollar subdued.
John Bilton
Managing Director
Head of Global Multi-Asset Strategy
Multi-Asset Solutions
• T his environment should underpin carry assets like credit and allow emerging market
(EM) assets to recover further. We upgrade stock-bond to a modest overweight, reflecting
how expensive government bonds have become; we prefer U.S. and EM equity to
Japanese equity and see high yield and EM debt leading credit returns.
• A starting point of near-zero yields in the bond market creates a challenge in generating
returns. Sharply higher yields are not our base case as demand for duration still outstrips
supply, and negative stock-bond correlation offers diversification benefits. Sources of
stable carry and an active approach remain key portfolio goals.
ASSET CLASS VIEWS CHART (PAGE 3)
Asset class Opportunity set
Equities/bonds
Duration
MAIN ASSET
CLASSES
Credit
Commodities
Cash
U.S. large cap
U.S. small cap
EQUITIES
Europe ex-UK
UK
Japan
Pacific ex-Japan
U.S. REITs
SOVEREIGN FIXED INCOME
U.S. Treasuries
Euro, core (Bund)
Euro, periphery (BTP)
UK Gilts
Japanese JGBs
Canadian gov’t bonds
Australian gov't bonds
CREDIT
Investment grade
U.S. high yield
European high yield
Emerging markets debt
USD
FX
REGIONAL PREFERENCE BY ASSET CLASS
Emerging markets
EUR
GBP
JPY
Change Negative Neutral Positive
The “sell in May” crowd was out in force at the start of the summer—as muscle memory of
the January sell-off, worries about eurozone banks, uncertainty about the Federal Reserve
and Brexit fears all pointed to a volatile season. Instead, a stable U.S. dollar, comforting Fed
language, reassuring macro data and apparent “containment” of Brexit fallout kept asset
markets supported. Between Memorial Day and Labor Day, most major asset classes
rallied—global equity up 4.3%, 30-year U.S. Treasuries up 4.1%, EM sovereign spreads 58
basis points (bps) tighter and U.S. high yield spreads 80bps tighter. Among major assets,
only oil and pound sterling suffered over the summer.
Our base case sees the economic outlook improving into year-end as risks in developed
economies become more balanced and the worst of the downturn in emerging economies
fades. Yet markets fear that this environment might prompt the Fed to take a hawkish tone. We
have sympathy with this concern because valuations are extended and sentiment is fragile,
putting greater emphasis than normal on the path of rates. We expect the Fed to strike an
accommodative tone—even as it gradually raises policy rates—in turn reassuring asset markets.
But as Fed Chair Janet Yellen is discovering, in the field of human endeavor there may be no
greater expression of “learning by doing” than the setting of monetary policy.
An apparent paradox is at work: The same ultra-loose policy that has mortgaged future
returns in sovereign fixed income markets and neutered eurozone bank earnings is
underpinning positive momentum in many asset markets. Yet the subtle twist here is that
the most damaging aspect of the Fed’s December 2015 rate hike was its contribution to the
ASSET ALLOCATION VIEWS
crescendo in U.S. dollar strength that sank commodity markets
and pushed EM sentiment to 20-year lows. With global growth
showing tentative signs of broadening beyond the U.S., one of
the planks of dollar strength is fading. Provided the Fed
maintains a “first, do no harm” approach and is mindful of the
global impact of rate decisions, a gradual rise in rates over the
coming months need not wreak the same havoc as the first hike
of this cycle. Nevertheless, markets are understandably anxious.
The mix of slow but positive growth and extended asset
valuations presents a challenge for investors. Economic optimists
should accept that equity multiples are quite full and are
sensitive to the higher policy rates, which may accompany
better growth. Pessimists, meanwhile, must recognize that
near-zero bond yields make for lean pickings in cautious
portfolios. With stock-bond correlations still negative we see a
persistent case for balanced portfolios. In our view, stocks can
modestly outperform government bonds, and carry assets like
credit, and dollar-sensitive EM assets, can perform well in our
base case of a “do no harm” Fed.
Our “low growth, no recession” view of the world continues
to drive portfolio allocation following our September Strategy
Summit. The improved trajectory of growth and full valuations
of government bonds are reflected with a mild overweight
(OW) to stocks vs. bonds. The U.S. remains our preferred equity
market. We add an OW to UK equity, based on currency support, and an OW to EM equity based on receding economic
risks and stable dollar; our least favored equity market is
Japan. In fixed income, we lean further into credit with an
OW to U.S. and European high yield, as well as to EM debt,
all funded out of investment grade; we maintain a neutral
duration view with a preference for U.S. Treasuries over
UK Gilts and German Bunds.
While we do adopt a slight pro-growth tilt, we are under no
illusions that asset returns will be anything but meager. Returns
are capped either by rich valuations or limits to plausible global
growth—or both. Yet we do believe that this economic expansion
has further to run and, more important, that policymakers are
acutely aware of their role in making this happen.
KEY THEMES AND THEIR IMPLICATIONS
EMERGING
MARKETS
MACRO
THEMES
DEVELOPED MARKETS
MACRO THEMES
GLOBAL MACRO
THEMES
Theme
Macro and asset class implications
Low inflation
Low inflation but not no inflation; threat of deflation is passing, but global spare capacity limits inflation risks
Global policy
divergence
Path of Fed normalization affected by global policy, which in turn keeps U.S. yields in check even as rates rise
Supply-side
weakness
If productivity and labor become binding constraints, inflation pressure could build and force Fed action
U.S. economic
strength
U.S. in the middle of a long and relatively flat business cycle; lends support to U.S. high yield credit and equities
Europe: gradual
growth recovery
Europe’s recovery continues, but monetary policy a negative for bank earnings; prefer to play via credit and EUR
Japan: beyond
Abenomics
Japanese economic risk becoming more binary; policy shifting from monetary to fiscal; may see yen rise further
Emerging markets
rebalancing
EM data are improving and USD helps stabilization; EM assets could extend run despite structural challenges
China in transition
Financial liberalization gives scope for further CNY downside; additional rounds of mini-stimulus are feasible
Source: J.P. Morgan Asset Management Multi-Asset Solutions; data as of September 7, 2016. For illustrative purposes only.
2
J . P . MO R G A N A S S ET M ANAGEM ENT
ASSET ALLOCATION VIEWS
Active allocation views
These asset class views apply to an intermediate-term horizon (that is, 12 to 18 months). Up/down arrows indicate a positive (
) or
negative (
) change in view since the prior quarterly Strategy Summit. This summary of our individual asset class views shows absolute
direction and strength of conviction but is independent of portfolio construction considerations.
Max negative
Asset class Opportunity set
SOVEREIGN FIXED INCOME
FX
CREDIT
REGIONAL PREFERENCE BY ASSET CLASS
EQUITIES
MAIN ASSET
CLASSES
Change Negative Neutral Positive
Neutral
Max positive
Rationale
Equities/bonds
Improved growth and near-zero yields see stocks outperform sovereign bonds
Duration
Better growth puts pressure on bonds, but strong bid for duration persists
Credit
Credit still a good alternative to stocks as loose policy supports carry assets
Commodities
Past the lows in commodities, but still a long way off a renewed supercycle
Cash
Negative and near-negative rates a disincentive to holding cash
U.S. large cap
High-quality bias, better nominal GDP and stable USD support EPS rebound
U.S. small cap
Better domestic growth justifies an upgrade, but valuations are a headwind
Europe ex-UK
Supportive data, margins and operating leverage; bank outlook a constraint
UK
Sharp weakening in GBP a big boost for UK stocks; oil rebound also helpful
Japan
Strong yen and fading hope for stimulus remove scope for earnings boost
Pacific ex-Japan
Concerns over China persist, but market is underheld and macro is steady
Emerging markets
Stable dollar and commodity outlook could see EM outperformance run further
U.S. REITs
Vulnerable to any rise in U.S. bond yields; prefer core real estate
U.S. Treasuries
Attractive on real yield terms against other sovereigns despite rising rates
Euro, core (Bund)
Zero or negative nominal yield; starting to hit limits on ECB policy
Euro, periphery (BTP)
Risks surround Italian referendum, but ECB QE supports periphery spreads
UK Gilts
Scope for inflation to rise as GBP falls, further undermining UK real yields
Japanese JGBs
More attractive on roll-down and real yield, but BoJ seeking to steepen curves
Canadian gov’t bonds
Spread to U.S. bonds now fair; data slowing
Australian gov't bonds
Attractive yield and carry plus further rate cuts keep support for AUD bonds
Investment grade
Further into credit cycle than HY; primary supply still relatively high
U.S. high yield
Spreads nearer fair value, but carry still attractive
European high yield
ECB action keeps bid in place for EU IG, which will spill over into HY
Emerging markets debt
EM balance sheet strength improving, attractive carry vs. G4 bonds
USD
Consolidation persists; USD balances Fed hikes and broadening global growth
EUR
ECB moves away from rate cuts; growth above trend
GBP
Fundamental outlook poor; further pressure likely as Brexit realities bite
JPY
Moving from monetary to fiscal stimulus; little scope for further JPY weakness
Source: J.P. Morgan Asset Management Multi-Asset Solutions; data as of September 7, 2016.
Diversification does not guarantee investment returns and does not eliminate the risk of loss. Diversification among investment options
and asset classes may help to reduce overall volatility.
J.P. MORGAN ASSE T MA N A G E ME N T
3
MULTI-ASSET SOLUTIONS
NEXT STEPS
J.P. Morgan Multi-Asset Solutions manages USD $178 billion in assets and draws upon the unparalleled
breadth and depth of expertise and investment capabilities of the organization. Our asset allocation
research and insights are the foundation of our investment process, which is supported by a global
research team of 20-plus dedicated research professionals with decades of combined experience in a
diverse range of disciplines.
For more information, contact your
J.P. Morgan representative.
Multi-Asset Solutions’ asset allocation views are the product of a rigorous and disciplined process
that integrates:
• Qualitative insights that encompass macro-thematic insights, business cycle views and systematic
and irregular market opportunities
• Quantitative analysis that considers market inefficiencies, intra- and cross-asset class models,
relative value and market directional strategies
• Strategy Summits and ongoing dialogue in which research and investor teams debate, challenge
and develop the firm’s asset allocation views
As of June 30, 2016.
Important Disclaimer
Investing in foreign countries involves a greater degree of risk and increased volatility. Changes in currency exchange rates and differences in accounting and taxation policies in foreign
countries can raise or lower returns. Also, some markets may not be as politically and economically stable. The risks associated with foreign securities may be increased in countries with less
developed markets. These countries may have relatively unstable governments and less established market economies than developed countries. These countries may face greater social,
economic, regulatory and political uncertainties. These risks make securities from less developed countries more volatile and less liquid than securities in more developed countries.
Equity securities are subject to “stock market risk”. The price of equity securities may rise or fall because of changes in the broad market or changes in a company’s financial condition,
sometimes rapidly or unpredictably. Fixed Income/Bonds are subject to interest rate risks. Bond prices generally fall when interest rates rise.
The views contained herein are not to be taken as an advice or a recommendation to buy or sell any investment in any jurisdiction, nor is it a commitment from J.P. Morgan Asset Management
or any of its subsidiaries to participate in any of the transactions mentioned herein. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes
only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of
production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. This material does not contain sufficient information to support an investment
decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal,
regulatory, tax, credit, and accounting implications and determine, together with their own professional advisers, if any investment mentioned herein is believed to be suitable to their personal
goals. Investors should ensure that they obtain all available relevant information before making any investment. It should be noted that investment involves risks, the value of investments and
the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yield
may not be a reliable guide to future performance.
J.P. Morgan Asset Management is the brand for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. This communication is issued by the following entities:
in the United Kingdom by JPMorgan Asset Management (UK) Limited, which is authorized and regulated by the Financial Conduct Authority; in other EU jurisdictions by JPMorgan Asset
Management (Europe) S.à r.l.; in Hong Kong by JF Asset Management Limited, or JPMorgan Funds (Asia) Limited, or JPMorgan Asset Management Real Assets (Asia) Limited; in India by
JPMorgan Asset Management India Private Limited; in Singapore by JPMorgan Asset Management (Singapore) Limited, or JPMorgan Asset Management Real Assets (Singapore) Pte Ltd; in
Taiwan by JPMorgan Asset Management (Taiwan) Limited; in Japan by JPMorgan Asset Management (Japan) Limited which is a member of the Investment Trusts Association, Japan, the Japan
Investment Advisers Association, Type II Financial Instruments Firms Association and the Japan Securities Dealers Association and is regulated by the Financial Services Agency (registration
number “Kanto Local Finance Bureau (Financial Instruments Firm) No. 330”); in Korea by JPMorgan Asset Management (Korea) Company Limited; in Australia to wholesale clients only as
defined in section 761A and 761G of the Corporations Act 2001 (Cth) by JPMorgan Asset Management (Australia) Limited (ABN 55143832080) (AFSL 376919); in Brazil by Banco J.P. Morgan
S.A.; in Canada for institutional clients’ use only by JPMorgan Asset Management (Canada) Inc., and in the United States by JPMorgan Distribution Services Inc. and J.P. Morgan Institutional
Investments, Inc., both members of FINRA/SIPC.; and J.P. Morgan Investment Management Inc. In APAC, distribution is for Hong Kong, Taiwan, Japan and Singapore. For all other countries in
APAC, to intended recipients only.
Copyright 2016 JPMorgan Chase & Co. All rights reserved.
II-AA-VIEWS-4Q16 | 0903c02a8170c199