Webconference replay: Market Insights update (Q1 2016) - J.P. Morgan Asset Management

Webconference replay: Market Insights update (Q1 2016)

“This is not going to be an easy year. To meet expectations you may have to lower your sights - or raise your game”  - Stephanie Flanders, Chief Market Strategist for the UK and Europe

Watch the video replay below   >

2015 was worse than 2014, and so far 2016 has been awful for markets. We came into this year with moderately positive feelings about the recovery in developed economies, but it hasn’t taken much to bring markets down. The root of this concern is China.

The moves in the Chinese stock market don't tell you much about the real economy. But there is no question that China will face a financial crisis of some kind – that shouldn’t surprise given how much debt has built up. The more important question for investors is how will that debt crisis play out and how much will the rest of the world be affected. Large Chinese asset reserves, less foreign ownership of Chinese debt, and still low levels of Chinese government debt relative to GDP should all equip the authorities better in dealing with the crisis than the Western economies in 2008.

Developed market (DM) consumers are now carrying the global recovery more or less by themselves. Of course, we’d love to have all global growth engines firing, but the DM consumer is a good one to have going, and it should mean moderate growth in 2016 as real wage growth in Europe and the US helps to spur stronger household credit growth and real private consumption.

The two key points to watch will be the strength of the US economy and the gap between the market's expectations for US policy rates, which suggest two rate increases in 2016, and the US Federal Reserves (Fed) own "dot plots" which suggest as many as four.

It is absolutely fundamental to our outlook that we do not see a US recession this year. That is an ongoing assumption and we don't see much evidence from the real economy of a downturn. But parts of the bond market are saying something different and this is something all investors need to be watching very closely in the months ahead.

Emerging markets (EM) face several structural challenges that remain unresolved: debt buildup, capital outflows, a strong US dollar and weak commodity prices. But these challenges don’t mean everything in EM has ground to a full halt and some countries are further along in their adjustment than others – India, for example. From a valuation point of view, emerging markets appear attractive for a longer-term investor. But momentum and fundamentals are still strongly negative and things are likely to be bumpy for a while yet.

Perhaps the most important factor for all asset classes in 2016 will be what happens to the US dollar. History shows the USD doesn’t always appreciate after the first Fed rate hike in a rate-rising cycle. However, there isn’t a lot of bad news that could come out that would make the dollar weaker. Some further dollar strength is manageable but I worry that a further sharp rise will make things harder for the Fed and for EMs – so investors would be wise to watch the USD exchange rate closely.

For equity markets closer to home, ask your UK fund managers what they are going to do to outperform when they can’t beat the index simply by steering clear of commodity stocks.

In general: stay diversified, remain active, and get smarter about different types on investing strategies that can gain when markets are volatile.

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Guide to the Markets: Q1 2016

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