J.P. Morgan Private Bank releases Mid-Year Investments Outlook

Global investment strategists warn about "recession obsession" as long-term outlook has brightened despite a well-telegraphed downturn

NEW YORK, June 5, 2023 /PRNewswire/ -- J.P. Morgan Private Bank today released its 2023 Mid-Year Outlook, "The Recession Obsession," sharing ideas critical to navigating investments for the remainder of the year. For the first time, the Private Bank's Mid-Year Outlook pairs anonymized client data with actionable investment strategies to illustrate how J.P. Morgan clients are investing their wealth.

Equipped with this unique insight around client investment patterns, J.P. Morgan's global investments strategists then explored how profound headwinds may create potential buying opportunities. Despite a multitude of risks, including continued war in Ukraine, broader geopolitical tensions, and elevated probability of a U.S. economic recession, they see the potential for high-single-digit returns over the next 12 months.

"While most investment conversations center on inflation and a looming recession, we're urging investors away from the so-called 'recession obsession' and to seek opportunities amid the volatility," said Clay Erwin, Global Head of Investments Sales & Trading at J.P. Morgan. "Markets are indicating the lows of October 2022 are behind us, and we think diversified portfolios can continue to generate higher returns than either cash or inflation into 2024."

The Private Bank's 2023 Mid-Year Outlook report identifies five key ideas to help investors navigate a well-telegraphed recession.

Rebuild equity portfolios for the next bull market.

"Our clients were right to sell stocks last year as global equities lost nearly 20%," said Jacob Manoukian, U.S. Head of Investment Strategy at J.P. Morgan., noting that J.P. Morgan clients have been net buyers of equities in just seven of the 30 weeks since the market bottomed, and half now have a lower allocation to equities than they did one year ago.

However, prospects for corporate profit growth look better than many realize – sales are resilient, transportation and energy costs are lower, the dollar is weaker, and the scramble for workers is less frantic. These factors are raising analysts' earnings expectations and revealing some notable entry points for investors.

While many are fixating on a coming recession for the broad economy, several industries including technology, semiconductors and homebuilder stocks have already experienced their own. J.P. Morgan global investment strategists view potential market sell-offs as the opportunity to build an equity portfolio that investors can carry into and through the next bull market.

European and Chinese equities emerge as bright spots.

Outperformance and home-country bias can direct investment preferences, underscoring why nearly two-thirds of U.S. clients have no exposure to China and half are materially underweight Europe relative to developed equity benchmarks.

"Underweights in either could now act as a drag on your portfolio," said Grace Peters, Head of EMEA Investment Strategy at J.P. Morgan.

Europe has outperformed the United States over the last 12 months, avoiding recession, defying expectations, and trading at a relative discount. J.P. Morgan global investment strategists see multiple reasons to be bullish on European equities, including a wider-than-usual valuation discount to the United States, impressive resilience in the face of several external shocks, and the escape from negative interest rate policy.

Although China has lagged relative to Europe, the tide appears to be turning due to a strong post-COVID reopening and supportive policy. A look at first-quarter GDP data shows a rebound in consumption and services activity, with recent indicators on exports, retail sales, and housing activity more mixed. Improving income growth and pent-up demand for restricted activities are expected to support a durable recovery.

Concentrated positions present higher than usual risks in the current environment.

Recent stock market volatility, capped off by regional bank failures, has made holding a concentrated position in a single stock or security a particularly pressing risk. 

"Consider a family that holds half of their net worth in a concentrated stock position with the other half in a diversified portfolio, which sustains their spending with the primary earner's income, along with the family's legacy, and personal retirement plans. Without a decline in value in the concentrated position, they have a high probability of achieving those goals. But after a 30% decline, their choices become harder and achieving goals more difficult," said Manoukian.

There are many different strategies to deal with concentrated positions, and each investor will choose a different strategy that aligns with their personal beliefs and goals. Creating a contingency plan enables investors to consider the consequences if, for reasons outside of their control, the asset suffers a material loss.

Cash was a good place to hide last year, but bonds offer protection and returns amid a downturn.

J.P. Morgan clients' allocations to cash in investment accounts, certificates of deposit, and short-term fixed income – securities maturing in less than a year – have risen by almost $120 billion over the last 12 months.

"This made sense during the fastest hiking cycle in 40 years, but we believe the cycle is complete. Should the Federal Reserve decide to reduce rates over the next 12 months, clients would need to reinvest over USD $500 billion – between 25% and 30% of their investible assets -- in what we think will be a lower rate environment," added Thomas Kennedy, Chief Investment Strategist.

J.P. Morgan global investment specialists believe cash rates are near their peaks, while bonds can provide a stable source of income and the potential for portfolio protection in an economic downturn. 

Understand the risks–and opportunities–in regional banks and commercial real estate.

The 2023 Mid-Year Outlook identifies two clear risks to the U.S. economy that could cause or accelerate recession stresses in regional banks and commercial real estate. Both of those issues stem from the rapid increase in interest rates, and both are intertwined given regional bank exposure to commercial real estate loans.

"Regional banks appear to have escaped the worst-case scenario, but the sector still confronts many serious challenges. Ultimately, we expect weakness in the sector until the Fed lowers interest rates," said Chris Baggini, Global Head of Equity Strategy. "Within commercial real estate, we are most negative on office buildings. U.S. regional banks look especially vulnerable with higher exposure to commercial real estate than large banks."

Investors may uncover opportunities in two specific arenas. First, by extending credit to high-quality borrowers who would traditionally borrow from a bank, and they may also buy distressed assets at a fraction of their intrinsic value.

Learn more about J.P. Morgan Private Bank's 2023 Mid-Year Outlook and download the full report at privatebank.jpmorgan.com/midyearoutlook.

About J.P. Morgan Private Bank

J.P. Morgan Private Bank provides customized financial advice to help wealthy clients and their families achieve their goals through an elevated experience. Clients of the Private Bank work with dedicated teams of specialists that bring their investments and financial assets together into one comprehensive strategy, leveraging the global resources of J.P. Morgan across planning, investing, lending, banking, philanthropy, family office management, fiduciary services, special advisory services and more. The Private Bank oversees more than $2 trillion in client assets globally. More information about J.P. Morgan Private Bank is available at privatebank.jpmorgan.com

SOURCE J.P. Morgan Private Bank