Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Private equity secondary market wikipedia , lookup
International asset recovery wikipedia , lookup
Financialization wikipedia , lookup
Financial economics wikipedia , lookup
Public finance wikipedia , lookup
Investment fund wikipedia , lookup
Interbank lending market wikipedia , lookup
INVESTMENT INSIGHTS Multi-Asset Solutions Weekly Strategy Report A review of global markets and portfolio positioning in Q4 2016 January 3, 2017 IN BRIEF • The fourth quarter was dominated by market reactions to the Donald Trump victory, which helped to sharply increase inflation expectations, leading to a surprising rise in rates. • With growth expectations also improving during this period, stocks broadly outperformed bonds, especially in the U.S. Meanwhile, emerging markets (EM) face new headwinds stemming from Trump’s election. • We are overweight equity and underweight duration. Within equities, we expect U.S. small caps to continue to outgain large, we are neutral Europe and Japan, have added to both our Canadian overweight and our UK underweight and remain moderately overweight in emerging markets. • Our fixed income positions include an ongoing relative preference for carry, modest overweights in the U.S. (concentrated in high yield) and Australia, shorts in Canada, the UK and Germany, and an underweight in EM government debt. Q4 IN REVIEW: TRUMP ELECTION, FED HIKE, MANUFACTURING REBOUND We review trends across markets and economies in Q4 2016, consider what they mean for our multi-asset portfolios and present a positioning update. AUTHOR Global markets in the fourth quarter responded to the unexpected outcome of the U.S. presidential election, the second Federal Reserve (Fed) rate hike during this expansion, and a firming of the international manufacturing recovery, as well as their implications: higher interest rates and a stronger U.S. dollar. Expectations for faster growth and higher inflation, on balance, led equities to outperform bonds. This divergence was clearest in the U.S. (Exhibit 1). G4 bonds underperform as rates reprice higher Michael Albrecht Vice President Global Strategist Multi-Asset Solutions Over the course of the fourth quarter, bond yields across G4 markets moved significantly higher, led by U.S. Treasuries. The outcome of the U.S. presidential election of November 8 sharply accelerated a bond sell-off already underway. Markets reacted to Donald Trump’s surprise victory by anticipating that his proposed fiscal stimulus, a combination of infrastructure spending and tax cuts, would lead to higher inflation—especially given nearfull employment at this stage of the cycle. Furthermore, possible protectionist trade MULTI-ASSET SOLUTIONS WEEKLY STRATEGY REPORT policies could lift consumer prices by raising the cost of imports (Exhibit 2). Rising energy prices also helped boost headline inflation and supported markets’ higher pricing of future inflation. Higher inflation prospects, in turn, implied a more hawkish Fed. The Federal Open Market Operations Committee (FOMC), whose members notably cited these inflation concerns, hiked the federal funds rate charged on overnight loans to banks by 25 basis points (bps) to between 50 and 75bps on December 14. Although this was long expected, the Fed’s Summary of Economic Projections, released with the rate decision, showed a greater-than-expected increase in its short-term rate forecasts, commonly referred to as “the dot plot.” The median of these projections suggested three hikes in 2017, which drove U.S. interest rates even higher. Since then, the U.S. 10-year Treasury has traded around the 2.50%–2.60% range, quite a way above its bottom of 1.36% in July. For now at least, the long, progressive decline in U.S. interest rates appears to be behind us. Rates in other major markets generally followed the U.S. upward, much the way they had followed UK Gilts downward during the post-Brexit repricing in the second quarter. But there was one clear exception this time: Japan. Facing an unexpected stress test as other markets’ rates rose, the Bank of Japan held to its September 21 pledge to keep 10-year Japanese Government Bond (JGB) yields near zero, making JGBs a strong relative performer in local currency terms. Meanwhile, European bonds gyrated on speculation over the future of European Central Bank (ECB) quantitative easing (QE); rates declined moderately on the bank’s announcement December 8 that it would extend the purchase program, ending the quarter only modestly higher. Developed market equities outperform, led by U.S.; emerging markets equities lag U.S. equities surpassed other major developed markets in U.S. dollar terms, partly due to President-elect Trump’s anticipated business-friendly, U.S.A.-first policies. U.S. small caps outperformed large by a factor of two. Small cap businesses tend to be more local and better able to withstand potential import tariffs. They are also more concentrated in financials, which currently account for 27% of the Russell 2000 vs. 14% of the S&P 500; financials’ earnings stand to benefit from wider net interest margins, which depend to a large extent on funding at low short-term rates, e.g., from depositors, and lending at higher long-term rates. Given the stronger U.S. EXHIBIT 1: ASSET CLASSES UNDERPERFORMED IN Q4 VS. 2016 OVERALL (TOTAL RETURN, USD, %) -10 Returns to fixed income were broadly negative during Q4, reversing much of the gain made earlier in the year, as markets priced in expectations for higher inflation and a more hawkish Fed. In equities, the U.S. outperformed, led by domestically focused small caps and banks. Emerging markets have the most to lose from a potential wave of protectionism and a stronger U.S. dollar; these assets have suffered. Global equity US large cap US small cap EAFE EMU equity JP equity EM equity Global agg US agg UST 2y UST 10y US IG US HY Global govt EMD EMD local Commodities -5 0 5 10 15 20 25 Q4 2016 Higher energy prices pushed up commodity indexes. 2 Multi-Asset Solutions Source: Bloomberg, J.P. Morgan Asset Management Multi-Asset Solutions; data as of December 30, 2016. For illustrative purposes only. Past performance is not indicative of future results. MULTI-ASSET SOLUTIONS WEEKLY STRATEGY REPORT dollar, the performance gap between the U.S. and other developed markets is smaller in local, or currencyhedged, terms. Notably, Japanese and U.S. interest rates diverged following Trump’s election, weakening the yen, while the ECB’s dovish QE decision weakened the euro, a boon, respectively, to Japanese and European exporters’ earnings prospects in local currency terms. In the euro area, however, concerns about banks’ stability continue to weigh on valuations. Both markets outperformed the U.S. in local currency terms, with Japan by far the leader. In U.S. dollar terms, emerging markets (EM) equities underperformed their developed markets (DM) counterparts in Q4. Our preference for taking risk in EM equities has been driven by improving fundamentals and, in fact, they outperformed DM equities until Trump’s election. Since then, EM assets have come up against twin headwinds: weaker relative prospects for exports and higher interest rates, since many emerging markets’ borrowing costs are effectively linked to rates in the U.S. ASSET CLASS IMPLICATIONS With market sentiment still firmly reflationary, we are overweight equity and underweight duration. The reflationary driver also has us betting that U.S. small caps continue to outperform their large-cap counterparts. We are now neutral on European and Japanese equities, which, although not fundamentally attractive markets, have potential short-term upside from the recovery in Europe’s banking sector and continued yen weakness. We have also added to our Canadian overweight in the nearterm, while we increase our UK underweight. We remain moderately overweight EM equities, which we believe were oversold post-election. Ultimately, we expect EM earnings and valuations to recover now that concerns about weak global manufacturing and China’s stability— factors that weighed so heavily on performance in the latter half of 2015—have receded. Our fixed income positioning, now underweight following the surprising rise in rates, reflects an ongoing relative preference for carry, with modest overweights in bonds in the U.S. and Australia, offset by shorts in Canada, the UK and Germany. Our U.S. position is concentrated in high yield, as credit spreads continue to look attractive on a risk-adjusted basis. We are also underweight EM government debt, which we view as more vulnerable to a rising dollar than EM equities, and with its longer duration, more vulnerable to rising interest rates than U.S. corporate debt. EXHIBIT 2: MARKET PRICING OF INFLATION HAS RISEN FOLLOWING TRUMP’S ELECTION The most noteworthy market movement of Q4 might have been USD per barrell 110 the sharp upward repricing of 100 inflation following Donald Trump’s 90 election, particularly in the five-year 80 forward/five-year breakeven measure shown here. The proximate inflationary driver is the prospect of fiscal stimulus in the latter stages of 2.5 2.3 5yr/5yr breakeven ► 2.1 60 1.9 50 40 possibility that protectionist policies 30 may raise import costs. Breakevens 20 2014 energy prices. 2.7 70 the business cycle, as well as the have also been supported by rising Breakeven inflation rate, YoY% 1.7 ◄ WTI crude (futures) 1.5 1.3 2015 2016 2017 Source: Bloomberg, University of Michigan, J.P. Morgan Asset Management Multi-Asset Solutions; data as of December 28, 2016. For illustrative purposes only. J.P. MORGAN ASSET MANAGEMENT 3 Global Multi-Asset Strategy: John Bilton Head of Global Multi-Asset Strategy London Patrik Schöwitz Global Strategist, Editor New York Thushka Maharaj Global Strategist London Mark Richards Global Strategist London Michael Hood Global Strategist New York Timothy Lintern Global Strategist London Diego Gilsanz Global Strategist New York Michael Albrecht Global Strategist New York NEXT STEPS For more information, contact your J.P. Morgan representative. Benjamin Mandel Global Strategist New York Important Disclaimer: 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. II-AA-WEEKLY-010317