J.P. Morgan Asset Management Releases 2016 Asset Allocation Views, Finds U.S. Dollar Key

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Dec 14, 2015, 01:03 ET

NEW YORK, Dec. 14, 2015 /PRNewswire/ -- J.P. Morgan Asset Management today released its 2016 Asset Allocation Views, which suggests the trajectory of the U.S. dollar will be the pivotal global asset allocation theme of next year, among other highlights. The research is derived from the firm's latest Multi-Asset Solutions Strategy Summit, where senior portfolio managers, strategists and research professionals come together to discuss current asset allocation views and key global themes in the context of the global economy, geopolitics, market forces and a series of quantitative and qualitative factors.

"The challenging market moves of 2015 left many pundits itching to call 'time' on this expansion. We disagree and see the U.S. economy as solidly mid-cycle. Until investors, consumers and corporates throw caution to the wind, the seeds of excess that will ultimately end this economic cycle will not be sown," said John Bilton, Head of Global Multi-Asset Strategy, J.P. Morgan Asset Management. "While we see challenges for next year, we expect global economic growth to accelerate modestly in 2016. We believe U.S. economic leadership will begin to broaden out, Europe's recovery should widen and deepen, and emerging economies should begin to stabilize as the year progresses."

Lessons Learned from 2015:

By the numbers, this past year saw U.S. GDP rise 2.6%, Europe print €560 billion (and counting), global inflation fall below 2% and China add the economic footprint of Indonesia to its GDP. At the same time, global manufacturing slumped, U.S. capital spending fell to its lowest level since 2010, Japanese growth faltered, and oil dropped 25%.
European and Japanese equities returned over 10%, while U.S. stocks were broadly flat; high yield (HY) credit spreads widened the most since 2011, but volatility markets remained fairly stable. The U.S. dollar gained 10% as the Federal Reserve (Fed) did little but ruminate on when to hike, yet the trade-weighted euro dipped just 3.5% even as the European Central Bank (ECB) unleashed the full force of quantitative easing (QE).
In a year of growth scares and choppy markets, it's little wonder investors were skittish. 2015 favoured hardly anyone. Erosion in sentiment, conviction and confidence is infecting many investors' 2016 outlook.

What's ahead for 2016:

We see a modestly better outlook in 2016. Expect global economic growth to accelerate modestly in 2016. U.S. economic leadership will begin to broaden out, we believe; Europe's recovery should widen and deepen; and emerging economies should begin to stabilize as the year progresses.
Greater stability in oil and the dollar should allow U.S. earnings to recover. At the same time, pro-cyclical QE in Europe should continue to boost stocks and credit. The confirmation that earnings are bottoming should address lingering fears that higher U.S. rates will snuff out growth. Stabilization in the U.S. dollar and commodity prices should also begin to support EM economies even as hefty debt loads, excess capacity and structural challenges remain a consideration.
Sovereign bond yields should drift upwards as inflation normalises and U.S. rates rise. Central bank buying and demand from liability managers will likely keep long-end yields in check, and 10-year U.S. Treasury (UST) rates nearer 3% than 2% in 2016 should not prove disruptive for stock markets. U.S. high yield offers equity-like return, but this needs to be discounted for liquidity constraints and sectoral risks; diversification and selectivity will be critical in harvesting carry across extended credit markets.

Investment Approach:

We're investing for a world of slow but positive growth. We look for a more stable U.S. dollar, a bottoming of earnings revisions and a steady hand from policymakers to reinforce market confidence. We'll also keep a close watch for signs of a shift in leadership from developed to emerging market assets.
We begin 2016 with a preference for European and U.S. stocks. We remain underweight to emerging markets, a position that we've held for some time. We have a preference for yield credit selectively in the U.S. and Europe, whereas we are underweight emerging markets debt. We are neutral toward duration and anticipate a trading range for the 10-year U.S. Treasury of 2.25%-2.75%. Finally, we are neutral towards commodities, as we expect oil to find a level around the mid-$40s

Please view the full 2016 Asset Allocation Views and key findings from the Multi-Asset Solutions Strategy Summit here.

About J.P. Morgan Asset Management
J.P. Morgan Asset Management, with assets under management of $1.7 trillion, is a global leader in investment management. J.P. Morgan Asset Management's clients include institutions, retail investors and high net worth individuals in every major market throughout the world. J.P. Morgan Asset Management offers global investment management in equities, fixed income, real estate, hedge funds, private equity and liquidity. JPMorgan Chase & Co. (NYSE: JPM), the parent company of J.P. Morgan Asset Management, is a leading global asset management firm with assets of approximately $2.4 trillion and operations in more than 60 countries. Information about JPMorgan Chase & Co. is available at www.jpmorganchase.com.

J.P. Morgan Asset Management is the marketing name for the asset management businesses of JPMorgan Chase & Co. and its affiliates worldwide.

SOURCE J.P. Morgan Asset Management