JP Morgan’s latest strategy piece recognizes that the market is undergoing a normal correction that will ultimately become a good buying opportunity (see our similar outlook here). They have turned near-term cautious based on the three growing global concerns:
- Chinese tightening
- Greek funding problems
- A US Administration plan to downsize the large banks.
All in all, JP Morgan says these three uncertainties are likely to persist for the next few weeks, but do not alter the macro landscape. Ultimately, the concerns will pass without damaging their recovery thesis (see JP Morgan’s top 10 trades for 2010 here):
“These three threats are unlikely to fade in coming weeks. Given the large number of investors who entered the year long equities, credit, and EM, one has to accept that the next few weeks will likely see further position squaring and continued weakness in risky markets. Further out, we retain a positive view and strategy on risky markets, as we do not consider the sum total of recent events significant enough to depress global growth. Our economic views are unchanged this week.”
How is JP Morgan responding to the downturn? They are staying long with a desire to add to positions at lower prices. They see no need to rush into equities at the current levels however. They maintain their crude oil short and several FX and commodity hedges:
- Asset allocation: Near-term correction on rising policy uncertainty. We stay with medium-term positive view. Investors planning to add risk do not have to hurry.
- Equities: Uncertainty has risen, but not enough to change strategy. Stay long, focusing on EM, cyclicals, and small caps. Within financials, favor credit banks over investment banks.
- FX: Sell GBP/CHF.
- Alternatives: Stay short crude oil. Be long cocoa, sugar, and coffee, but short grains.
Source: JP Morgan
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
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