Summary
If the US economy continues to perform well, the higher-for-longer narrative could persist, and risk assets are likely to do well in the near term. However, the multi asset team’s base case is for a shallow recession in the 6-12 months horizon and they stand ready to adopt a more defensive positioning.
Macro: Resilient US economy delays Fed’s pivot
The global economy continues to expand steadily, led by strong US growth. The expansion in manufacturing output was widespread across various countries and sectors. The service sector leads the global output. US consumer spending, a key driver of US growth, continues to be robust. Given the recent resilient US economic data, the multi asset team expects the data-dependent Fed to begin pivoting only on clear signs of an impending recession and/or clear easing of core inflation toward its 2% target rate.
Global PMI, March 2024
Source: J.P. Morgan, LSEG Datastream, 15 March 2024.
Asset allocation: Staying “risk-on” for now
The market backdrop continues to be driven by positive US economic data pointing to a robust environment. As a result, the multi asset team is tactically overweight US equities in the shorter term. However, given that US valuations are at historically high levels, the team remains cautious and prepared to reallocate to fixed income once US growth starts slowing and sentiment turns negative. Over the 12-month horizon, the team is positive on long-term government bonds as US duration stands to benefit from a backdrop of slowing growth and disinflation.
Asset allocation views
Equities: Asian equity valuations remain cheap relative to other regional markets
The team believes there is more short-term upside for US equities if economic data and sentiment remain firm. Over the medium term, the team is more constructive on Asia ex-Japan equities especially since earnings growth in the region has the potential to outpace that of developed markets. This is especially the case if a global recession transpires and is concentrated in developed markets. Furthermore, Asian valuations are relatively more attractive than the US and Europe.
IBES MSCI 12 forward P/E: US vs. Asia ex-japan
Source: LSEG Datastream, 17 April 2024.
Bonds: Higher yielding assets remain in favour
While the Fed will not prematurely cut rates, over the 12-month horizon the team anticipates that US yields will move down as the disinflation trend plays out. For now, they favour US high yields to US investment grades given the latter’s extremely tight spreads. The current economic backdrop, i.e., the lower chances of a severe recession and reduced expectations of rate cuts, is also ideal for Emerging Market USD debt. EM debt is less sensitive to EM monetary policies and more sensitive to changes in US rates.
US Investment Grade and High Yield ICE BoFA Option Adjusted Spread (in basis points)
Source: LSEG Datastream, 16 April 2024.
Currencies: USD continues to be supported by resilient US growth
The team recently upgraded the short-term outlook on USD (broad) to slightly positive from a neutral stance. Strong US growth and high real rates should continue to support USD in the near term. Over the 12-month horizon, the USD, given its counter-cyclical nature, stands to benefit in a slowing global growth environment.
JP Morgan US Dollar REER
Source: LSEG Datastream, 7 April 2024.
This is an extract of the 2Q24 Market Outlook. Click here to download the full report which includes a special feature “India: Why the future looks bright”.
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