Global Asset Allocation Views 4Q 2021
Insights and implications from the Multi-Asset Solutions Strategy Summit
- Over recent months, we have seen a slowing of growth momentum and a renewed focus from some investors on potential tail risks. Despite a moderating pace of growth, we see a positive direction for the global economy and further upside for corporate earnings.
- Central banks are past the point of maximum monetary policy accommodation, but even so, financial conditions remain extremely easy, with negative real rates set to persist for some time, providing a supportive backdrop for risk assets.
- We favor a pro-risk tilt with an overweight (OW) to stocks spread across the U.S., Europe and Japan, and with a modest cyclical tilt. Stock-bond correlation has returned to negative territory, so while we take a mild underweight to duration, we acknowledge its role as a portfolio diversifier.
- Credit stays at a small OW but with returns driven largely by carry; although valuations are undemanding, we remain neutral on emerging market equity and debt, as the growth and earnings outlooks continue to lag developed markets.
Between Memorial Day in May and Labor Day in September — the traditional U.S. summer season — the S&P 500 made a record 28 all-time highs in 69 days of trading, delivering a price return of 7.9%. The upward grind of stocks in this most unusual of summers ran counter to the “Sell in May and go away” maxim: On average over the last 50 years, the S&P returned 1.7% between May and September, and 7.3% from September to the following May. A summer rally does have precedent, but the record number of new highs — against the backdrop of monetary policy uncertainties, Chinese regulatory change and the ebb and flow of coronavirus statistics — certainly bears scrutiny.
We continue to expect above-trend growth through the end of 2022 and see further upside for equity earnings as economies around the globe reopen fully and pent-up demand materializes. But without doubt, the momentum of growth is diminishing, and over the summer we saw economic surprise indices drop from elevated levels.
While moderating growth presents a headwind for stocks, not least by denting sentiment, a supportive backdrop remains in place: ample liquidity, strong household balance sheets and a powerful capex cycle. Crucially, too, not all of the rebound in equity earnings is yet reflected in analysts’ forecasts — providing a basis for further upside.
To be sure, there are some confusing signals across markets — not least from the bond market, which continues to appear detached from fundamental growth and inflation dynamics. But we would argue that this situation could persist for some time, given the ongoing central bank demand for duration, as well as other, less price-sensitive demand for bonds, such as by pension portfolios de-risking. Even accounting for a tapering of Federal Reserve (Fed) purchases starting later this year, we expect real yields to remain profoundly negative throughout 2022.
In the dog days of summer, we were certainly reminded that risks beyond COVID-19 continue. Regulatory tightening in China and, most recently, issues in China’s property sector have weighed on the wider emerging market (EM) complex. But even when they did, the U.S. and other developed equity markets remained reasonably poised. While some would argue a correction might be overdue, even in the event of a drawdown we would expect buyers to emerge quickly — noting, as we do, that the underlying combination of growth drivers and easy policy probably still outweigh the potential tail risk issues.
In our multi-asset portfolios, we reflect our economic optimism with continued overweights (OW) in equities and credit and continued underweights (UW) in duration and cash. Within equities, we maintain a preference for developed markets over emerging markets, with reasonable balance across the U.S., Europe and Japan — the U.S. providing a quality angle to our exposure and Europe and Japan offering a welcome cyclical tilt. In credit, we favor high yield, but at this mid-cycle stage in the economic expansion, we note that credit is largely a carry, rather than a capital growth, asset.
On the face of it, very little has changed in our preferred asset allocation from our last Strategy Summit, in June. However, below the surface, we continue to make subtle but important changes within portfolios. Notably, our attitude to duration has shifted. At the start of the year, we expected a rapid rise in yields and could take a pro-growth stance through an underweight in bonds. For a time, stock-bond correlations drifted into positive territory, in turn presenting a challenge to portfolio construction. As the sum of investors’ fears has shifted from inflation to growth, negative stock-bond correlation has reasserted itself, and despite low prevailing yields, bonds once again play a valuable role in portfolios, offsetting pro-risk positions taken in stocks.
While we continue to expect yields to rise from here and note that our quant models remain strongly negative on duration, we expect both the scale and the pace of yield increases to be modest. For investors with a significant pro-risk stance in equities, the portfolio benefits of holding duration may now outweigh the mildly negative outlook that we have on bonds in isolation.
In sum, our portfolio maintains a pro-risk tilt, mainly through stocks. While we see the momentum of equity returns moderating, we do not expect a change in the direction over the coming months. The greatest risk to our portfolio stance today is a disappointment on growth — not an overshoot in inflation. But at the same time, we note that policymakers around the globe remain committed to supporting nominal growth, and this, in our view, provides a supportive backdrop for risk assets.
Multi-Asset Solutions Key Insights & “Big Ideas”
The Key Insights and “Big Ideas” are discussed in depth at our Strategy Summit and collectively reflect the core views of the portfolio managers and research teams within Multi-Asset Solutions. They represent the common perspectives we come back to and regularly retest in all our asset allocation discussions. We use these “Big Ideas” as a way of sense-checking our portfolio tilts and ensuring they are reflected in all of our portfolios.
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 303 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 June 30, 2021.