Global Asset Allocation Views 1Q 2020
Themes and implications from the Multi-Asset Solutions Strategy Summit
- This year was dominated by trade tension, weak manufacturing and a sharp dovish shift in monetary policy. In 2020, we anticipate that headwinds from trade and manufacturing dissipate while policy will remain accommodative; and as a result, we expect economic momentum to improve, with growth returning to trend by mid-2020.
- As economic data rebound, we expect the rally in stocks to continue and for bond yields to increase. We upgrade equities to a small overweight (OW) and downgrade duration to an underweight (UW). We maintain our neutral view on credit and keep a small OW on USD-denominated cash.
- Within equities, we expect the U.S. to lead, and see the outlook for emerging markets improving. In credit we prefer to remain in higher quality sectors, and in bonds we favor U.S. Treasuries over UK Gilts. Renewed trade tension is still a risk, but as odds of recession have declined, conviction in our base case of a moderate acceleration has increased.
In many ways, 2019 was a year of dislocation and disruption, and for market participants the yawning gulf between stock market returns and economic growth was probably the clearest illustration of this. Over the year, economic activity and asset markets moved in opposing directions as earnings growth flatlined and world GDP sank to below trend, yet all major asset classes posted handsome gains, a simple USD 60/40 stock-bond portfolio delivering 17% year-to-date.
The key questions investors should be asking as we move into 2020 are: What led to this unusual divergence of growth and returns, and will the environment persist into next year? In our view, three factors — a global manufacturing slump, heightened geopolitical tension and easier monetary policy — were the hallmarks of 2019. Simply put, manufacturing weakness and geopolitical uncertainty weighed on GDP and other activity data via capex, inventories and confidence channels; but at the same time, policy easing dominated their impact on asset returns, boosting valuations on stocks and bonds alike. Over the next 12 months, we expect the recent recovery in economic momentum will gain traction, with global economic growth returning to trend by mid-2020. We also believe the trade tensions that contributed to this year’s fraught geopolitical environment will continue to ease as the political calculus in Washington tilts toward preparing for November’s presidential election.
We expect 2020’s recovery in economic activity to be more tempered than the rebound we saw in 2017, as the ingredients for a synchronized upswing in global growth are not so fresh and pent-up demand less evident. Equally, though, we note that downside tail risks have declined and the balance of economic risks for 2020 is rather more even than in 2017; some upside risks, such as a recovery in corporate confidence and activity, now appear more plausible. Our economic outlook anticipates a rebound in activity sufficient to provide trend-like growth and maintain high levels of employment, but not strong enough to stoke inflation and force central banks to rethink their accommodative policy. This suggests further upside to equity markets in 2020. While we acknowledge that stocks have delivered strong returns this year, we do not think that all of the recovery in activity and easing of political risk have been priced in. Equity returns in 2019 were entirely driven by valuations, but given where they started — immediately following a fourth-quarter sell-off in 2018 — valuations on global equities are now roughly back in line with their long-term average. A modest, mid-single digit rise in earnings in 2020, combined with typical dividends, would suggest upper-single digit global equity returns even without any heroic assumptions on margins or valuations.
By contrast, bonds are likely to suffer as yields rise modestly. Extremely low yields, flat curves and a recovery of risk appetite combine in our quant models to generate a strongly negative signal for global duration. From a fundamental perspective, we note that the tail risks which drove global yields to record lows over the summer have abated. Overall, we do expect bond yields to increase in 2020; however, the easy stance of central banks, and their persistent demand for duration, will likely limit how much bonds can sell off.
In our multi-asset portfolios, this economic outlook leads us to a small overweight (OW) in equities and an underweight (UW) in global government bonds. We prefer to add a unit of risk to stocks rather than credit, since we believe that a further rally in yields — especially in high yield (HY) bonds — is constrained by low riskless rates. Nevertheless, in a modest recovery credit offers reasonable carry, so we stay neutral on the asset class. Finally, we maintain a small OW to USD cash, where real yields are not punitive and we are afforded a little “dry powder” in the portfolio. Within equities, we keep our preference for the U.S. but note that it is waning a little at the margin. Were global economic data to pick up more strongly than we are forecasting, it is likely that emerging market (EM) equities would be a beneficiary, alongside other more cyclical regions, like Japan. Fixed income is likely to see a continued hunt for yield, with higher quality corporate credit, as well as EM hard currency sovereign debt, the potential beneficiaries within the asset class.
Overall, we see a year of growth and moderation ahead: Growth in terms of the economy and earnings but moderation in terms of monetary policy, multiple expansion and asset market returns. Downside risks are fading, but a renewed bout of trade tension and further weakness in China are key factors to monitor in 2020. So too are upside risks from increased corporate activity or a more emboldened consumer. After the febrile environment of 2019, this moderation may be a welcome relief to many and could serve to improve investor confidence and provide a foundation for positive market momentum over the next year.
Key themes and their implications
ACTIVE ALLOCATION VIEWS
These asset class views apply to a 12- to 18-month horizon. Up/down arrows indicate a positive (▲) or negative (▼) change in view since the prior quarterly Strategy Summit. These views should not be construed as a recommended portfolio. This summary of our individual asset class views indicates strength of conviction and relative preferences across a broad-based range of assets but is independent of portfolio construction considerations.
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 Multi-Asset Solutions manages over USD 250 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.
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 September 30, 2019.
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JPMorgan China Income Fund
To provide investors with income and long-term capital growth by investing at least 70% of its non-cash assets in (a) equity securities of companies which are based in, listed on any stock exchange of, or operate principally in the PRC and that the Investment Manager expects to pay dividends and (b) Chinese debt securities issued and/or distributed in or outside the PRC.