JP Morgan's View on Global Asset Allocation
• Portfolio strategy –– Stay with a defensive stance. High-quality bonds will be the first to recover
• Economics –– We see the Fed, the BoJ and the SNB each having policy rates near zero by early next year.
• Fixed Income –– We are bullish duration in developed markets and recommend 2s10s flatteners in the US
• Equities –– Stay underweight Cyclicals and long Value vs Growth
• Credit –– Stay overall underweight, albeit a small one only. Further HF and synthetic credit unwinding pose main downside risk to credit.
• FX –– Stay long the creditor currencies and short the debtor currencies, i.e. long JPY vs USD and EUR, short GBP vs CHF and long USD vs ZAR
• Alternatives –– Investors redeemed $40bn from hedge funds in October. Commodities markets to remain lacklustre in 2009.
• Markets remain in deep recession mode, with government bonds rallying strongly and equity and credit markets falling off a deep cliff. Despite the severe economic contraction already in the price, we advise staying in recession strategies as economic news is set to remain awful and volatility is still way too high to entice value-interested investor. The only hope we have is for
some form of short-covering when economic activity data no longer surprises super-negative investor base.
• The extremeness of the world economic contraction is likewise forcing global policymakers into extreme measures. These will eventually push up spending, but not until some time next year. In the meanwhile, investors should heed the impact of these measures.
• The zero-interest rate policy that many of the major economies are headed for will destroy the return on cash that everyone has been piling into to escape the carnage in risky markets. Once cash truly has no return, investors will venture out along the curve, first into the safer, higher-grade bonds issued by supranationals and large banks. Our high-grade bond index currently yields a high 7.8% in dollars and 6.3% in euros. The strong increase in issuance of high grade corporates and in particular of guaranteed bank bonds over the past two weeks, despite a worsening economic crisis, shows that this switch from cash to high-quality bonds has started. The relatively high excess yield per unit of risk of high grade implies to us that high-grade will recover before other risky markets such as low-grade bonds and stocks. Tactically, we are not long highgrade yet, given the remaining risk of forced unwinding by hedge funds, but we are near the point where we will likely switch to a long position.
• Portfolio strategy –– Stay with a defensive stance. High-quality bonds will be the first to recover
• Economics –– We see the Fed, the BoJ and the SNB each having policy rates near zero by early next year.
• Fixed Income –– We are bullish duration in developed markets and recommend 2s10s flatteners in the US
• Equities –– Stay underweight Cyclicals and long Value vs Growth
• Credit –– Stay overall underweight, albeit a small one only. Further HF and synthetic credit unwinding pose main downside risk to credit.
• FX –– Stay long the creditor currencies and short the debtor currencies, i.e. long JPY vs USD and EUR, short GBP vs CHF and long USD vs ZAR
• Alternatives –– Investors redeemed $40bn from hedge funds in October. Commodities markets to remain lacklustre in 2009.
• Markets remain in deep recession mode, with government bonds rallying strongly and equity and credit markets falling off a deep cliff. Despite the severe economic contraction already in the price, we advise staying in recession strategies as economic news is set to remain awful and volatility is still way too high to entice value-interested investor. The only hope we have is for
some form of short-covering when economic activity data no longer surprises super-negative investor base.
• The extremeness of the world economic contraction is likewise forcing global policymakers into extreme measures. These will eventually push up spending, but not until some time next year. In the meanwhile, investors should heed the impact of these measures.
• The zero-interest rate policy that many of the major economies are headed for will destroy the return on cash that everyone has been piling into to escape the carnage in risky markets. Once cash truly has no return, investors will venture out along the curve, first into the safer, higher-grade bonds issued by supranationals and large banks. Our high-grade bond index currently yields a high 7.8% in dollars and 6.3% in euros. The strong increase in issuance of high grade corporates and in particular of guaranteed bank bonds over the past two weeks, despite a worsening economic crisis, shows that this switch from cash to high-quality bonds has started. The relatively high excess yield per unit of risk of high grade implies to us that high-grade will recover before other risky markets such as low-grade bonds and stocks. Tactically, we are not long highgrade yet, given the remaining risk of forced unwinding by hedge funds, but we are near the point where we will likely switch to a long position.
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