JPMAM’s base case is that the economic outlook is improving into year-end as risks in developed economies become more balanced and the worst of the downturn in emerging economies fades.
Markets fear that this environment might prompt the Fed to take a hawkish tone, however, according to John Bilton, global head of multi asset strategy at JP Morgan Asset Management.
“Markets want confirmation of growth and it is crucial, as we move into a more inflationary world, that the Fed does not overreact,” he said. “One thing that has the potential to kill the market is extra dollar strength.”
He added that the dollar rise has abated this year, emerging markets have had the opportunity to rebound and financial conditions have been kept in check. “This backdrop supports the growth outlook but anything that breaks this circularity would force us to rethink our base case,” explained Bilton.
He noted that right now the central banks seem laser-focused on keeping the ‘low but steady’ growth environment in place.
"Provided the Fed maintains a ‘first, do no harm’ approach - we expect the Fed to remain cautious and strike an accommodative tone - 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," he continued. "This should provide some degree of reassurance to asset markets. Nonetheless, markets remain understandably anxious.”
Due to the challenging environment and because correlations remain negative JPMAM sees a case for a balance between stocks and bonds.
Bolton said that JPMAM maintains a mild overweight to stocks and expects carry assets like credit, and dollar-sensitive EM assets to perform well. "US remains our preferred equity market and we have added an overweight to UK equity," he said, adding that he expects further legs down in sterling to come.
Japan is the asset manager's least favoured equity market. "In our opinion, it’s unlikely that we’ll see a significant weakening of the yen and as the Bank of Japan pivots towards fiscal policy this should only serve to strengthen the currency. We also do not think Japan has the capacity to grow earnings over the next 12 months."
"We’ve also introduced a cautious overweight to EM equity based on receding economic risks and the stable dollar, having been EM bears for the better part of five years,” Bilton added.
In fixed income, JPMAM leans further into credit with an overweight to US and European high yield, as well as to EM debt, as a carry play and proxy for duration. "We maintain a neutral duration view but with a preference for the US and Australia over UK Gilts and German Bunds," he said.