Mike Coady, deVere Group talks economics with JP Morgan Asset Management
I recently met with David Lebovitz, a Market Analyst in Global Market Insights Strategy Team with J.P. Morgan Asset Management. In this role, David is responsible for supporting the team’s Market Strategists and helping them deliver timely market and economic insight to clients across the country and had an opportunity to ask him some questions with regards to the current financial markets.
Do you think that this current market rally will continue? Why do you feel the rally was so quick to gather momentum?
The market may have hit a stumbling block, as the a marginally stronger Yen and disappointment over Abe’s economic growth policy have sent the Nikkei lower, concerns over the tapering of QE in the US has pushed yields higher and the S&P 500 lower, and weak growth in emerging markets have caused yields to spike and currencies to weaken (which has taken a toll on their equity markets as well). This has all injected a sense of uncertainty into the current market environment. While this is not a market peak, it is important to keep in mind that markets had been melting upward for some time, and a correction was something that many were expecting.
The rally quickly gathered momentum earlier this year due to “less bad news;” in other words, investors continued to bid up equity prices as they did not have a concrete reason to avoid risk assets.
Were analysts, in general terms, taken by surprise by this rally? And what has been their response to it?
Analysts were not necessarily surprised by this rally, as strong fundamentals had been suggesting (and continue to suggest) that equity markets are undervalued, but at the same time, they were expecting a correction given that markets seem to be ignoring some of the less than stellar data (sequester in the US, continued recession in Europe, weak EM growth). I think what has been most surprising is the market’s response to Bernanke’s comments about tapering QE; however, he may have been trying to spook markets to prevent a sharp-sell off like we saw when the Fed started tightening in 1994.
What underlying dangers /risks does JPM still see within the global economies that could still unsettle this upside?
The US budget sequester is about to bite the hardest, and will drag on US growth in the second half; however, this is expected and well-known, so it should not result in too large of a shock to the markets. I think that the biggest risk is that markets overreact to the possibility of Fed tapering, or that the Fed actually starts tapering too early. It is important to keep in mind that although the US economy is the “best house on the worst block,” US monetary policy has an impact that extends far beyond US borders. As a result, a withdrawal of stimulus in the US could negatively affect economies and markets around the world, particularly in EM.
What are your generic market predictions for Q3 and Q4 2013?
I think that global economic growth will accelerate in the second half of 2013, but that this will be led by developed, rather than emerging markets. Furthermore, inflation should remain relatively benign, and the USD will likely strengthen.
What sectors might investors be overweight/underweight in as a result?
I think the best play is to be overweight developed market equities and overweight corporate credit relative to sovereign debt. Within equities, the more cyclical sectors should benefit from an acceleration in growth, while the defensive sectors (the “bond proxies”) could decline as higher yields push some investors back into fixed income. Within credit, I would be overweight both high yield and investment grade, as the former should provide decent returns as growth improves and spreads tighten (particularly in the wake of the recent sell-off), and the later should see spreads compress as long as the sequester does not impact growth (and exhibit less volatility than HY).
Bearing in mind your market forecasts, what would be your top three pieces of advice that financial advisers should be sharing with their clients?
- Remember to take a long-term view and stay the course; as we have seen in Japan, things can happen very quickly in markets, and there is no point in trying to figure out the next how to time the next big trade.
- Balance and diversify; it is impossible to predict how markets will behave, and an investor’s best weapon against uncertainty is balance and diversification, as they can help reduce volatility and enhance return.
- Make sure the risk you are taking is aligned with your long-term investment goals; if you cannot get your money to grow, you will not get your money to last, but taking on more risk than you can realistically handle is not the right (or responsible) way to grow assets.