J.P. Morgan internal market outlook memo (Nov 2012) – asset allocation and macro commentary

Global Asset Allocation The J.P. Morgan View 09 November 2012 Jan Loeys (1-212) 834-5874 jan.loeys@jpmorgan.com As aresult, we stay underweight US equities and have moved risk from our US credit longs into Europe. Our initial US equity underweight was against Europe and EM Asia. Our recent downgrade of Q1 growth in the Euro area and better activity data in China made us move the lion’s share of the overweight versus the US into EM Asia (see Wednesday’s Global Market Outlook and Strategy). Chinese activity data continue to surprise on the upside. October data for IP, retail sales and fixed investment each came above our expectations. This creates upside risk, but no change yet, to our forecasts which already assume a gentle rise in quarterly growth rates from under 7% early this year to just above 8% in Q1. Better data reduce the need for renewed fiscal and monetary stimulus. The 18th Party Congress started yesterday, will last a week, and will be followed by the announcement of the next leadership. More important for the economic outlook will be the Annual Central Economic Working Conference that will be held in December. We expect it to support continued moderate fiscal policy, a neutral monetary policy, and further economic rebalancing towards domestic consumption. It may also lower the 2013 growth target to 7%. For more details, see Haibin Zhu in today’s GDW. Fixed Income Bonds rallied strongly, in the slipstream of the tumbling equity market. President Obama’s re-election perhaps also diminishes expectations of a change in course at the Fed. The ECB and the Bank of England stood pat at their policy meetings this week, but the latter delivered a curveball today, announcing that its net coupon income from QE would be transferred to the UK Treasury from next year on. The near-term effect is a slight monetary easing, as the money will be used to reduce the amount of gilts in issue, similar to QE itself. Beyond that, this is another small step towards perceptions that monetary policy is no longer independent from fiscal policy, like the Bank of Japan’s joint statement with two government ministers last month. Nobody knows the tipping point at which these perceptions feed into much higher inflation expectations, just that we'll know it when we see it. Core euro bond yields are towards the low end of the range, and we expect them to head higher. But we focus more risk on spread compression trades, via overweights in Euro area peripherals, US MBS, and EM local bonds vs DM. Equities Equity markets fell sharply post US elections, but we are not changing our strategy. From a month ago, we avoided directional longs in our GMOS model equity portfolio due to elevated positions by spec investors (see Charts A10 and A12 in today’s Flows & Liquidity). We preferred to focus instead on regional and sectoral trades. We stay with the same strategy focusing our recommendations on EM Asia across regions, and Cyclical stocks and US Home builders across sectors. The rebound in the October global manufacturing PMI is what keeps us long Cyclical vs. Defensive equity sectors. Is this a high-beta trade? Not J.P Morgan 2012 global GDP growth forecasts: JPMorgan and Consensus 4.5 4.0 35 Consensus 3.0 JPM 2.5 2.0 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Source: J.P. Morgan, Consensus Economics. Consensus Economics forecasts are for regions and countries that we averaged using the same 5-year rolling USD GDP weights that we use for our own global growth forecast. 2013 global GDP growth forecasts: JPMorgan and Consensus 3.4 39 Consensus 2.9 JPM 27 2.4 Jan-12 Apr-12 Jul-12 Oct-12 Source: J.P. Morgan, Consensus Economics. Consensus Economics forecasts are for regions and countries that we averaged using the same 5-year rolling USD GDP weights that we use for our own global growth forecast. More details in ... Global Data Watch, Bruce Kasman and David Hensley Global Markets Outlook and Strategy, Jan Loeys, Bruce Kasman, et al. US Fixed Income Markets, Terry Belton and Srini Ramaswamy Global Fixed Income Markets, Pavan Wadhwa and Fabio Bassi Emerging Markets Outlook and Strategy, Joyce Chang Key trades and risk: Emerging Market Equity Strategy, Adrian Mowat et al. Flows and Liquidity, Nikos Panigirtzoglou et al. Description of YTD Chart on front page: Returns in USD. “Local currency. “*Hedged into USD. Euro Fixed Income is iBoxx Overall Index. US HG, HY, EMBIG and EM $ Corp are JPM indices. EM FX is ELMI+ in $. HOUSE_OVERSIGHT_026573