PORTFOLIO INSIGHTS

Global Asset Allocation Views

Themes and implications from the Multi-Asset Solutions Strategy Summit
1Q 2019

IN BRIEF
AUTHOR
• The economic outlook is reasonable, and the risk of recession in the next 12 months
remains quite low; however, global growth reverted to trend more quickly than expected,
U.S. monetary policy is tightening, and trade rhetoric is escalating—all of which represent
downside risks.
• Slowing economic momentum and tightening policy lead us to de-risk our multi-asset
portfolios, most visibly by reducing stock-bond to a small underweight (UW). This
continues down a gradual de-risking path that began in the middle of the year.
• Within equities, we still most favor the U.S., least favor eurozone equities and bring
John Bilton, CFA emerging market equity to a small UW. We keep our small overweight (OW) to duration,
Managing Director
Head of Global Multi-Asset Strategy
and we raise our cash allocation to OW, specifically for USD cash, where real policy rates
Multi-Asset Solutions are edging to positive territory. We stay neutral on credit but note increased headwinds
to fundamentals. This allocation mix is, in our view, appropriate for an environment of
slowing earnings growth and rising macroeconomic risks.
ASSET CLASS VIEWS (PAGE 3)
Max negative Neutral Max positive
Asset class Opportunity set Change Negative Neutral Positive
Equities/bonds

Duration
IN THE CLOSING WEEKS OF THE YEAR, A SOMBER MOOD HAS GRIPPED
MAIN Credit MARKETS. January’s optimism faded long ago, and now, as investors recalibrate the level of
ASSET
CLASSES Commodities
future growth and markets reprice what multiple to put on that growth, risk appetite is under
Real estate

Cash
attack from all sides. Earlier in the cycle, we treated such bouts of caution as opportunities to
U.S. large cap add risk to portfolios. Today, however, the cycle is distinctly mature, with limited capacity to
U.S. small cap
absorb shocks, and financial conditions are tightening inexorably. Most crucially, the hurdle for
Europe ex-UK
sustained positive economic surprises, sufficient to reignite the bull market in risky assets,
EQUITIES

UK

Japan
is beyond any reasonable scenario we can paint today.
Asia Pacific ex-Japan

Emerging markets

Direct real estate

At present, the objective probability of a recession in the next 12 months remains low, and
ESTATE
REAL

U.S. REITs higher frequency economic data are reasonable. However, the pickup in capex anticipated for
U.S. Treasuries
the second half of the year hasn’t fully materialized, growth is dipping back to trend more
PREFERENCE BY ASSET CLASS

U.S. TIPS
SOVEREIGN FIXED INCOME

Euro, core (Bund)

quickly than expected, and data outside the U.S. are a mixed bag. In sum, economic
Euro, periphery (BTP) momentum is moderating just as U.S. monetary policy is quickly approaching—some would
UK Gilts
argue is already in—tight territory. Given the shift in the economic environment, the ongoing
Japanese JGBs

Canadian gov’t bonds path of policy tightening and the slowing of earnings growth we expect in 2019, we have
Australian gov't bonds chosen to meaningfully de-risk our multi-asset portfolios—most visibly by reducing stock-bond
Investment grade

U.S. high yield

to a small underweight for the first time in nine years.
CREDIT

European high yield

Emerging markets debt The decision to de-risk is not a sharp volte-face, but continues down a path that began in the
USD middle of the year. The moderation of economic growth back to trend may yet play out
EUR
benignly. If employment remains robust, the Federal Reserve (Fed) does not overtighten and
FX

GBP

JPY the trade dispute ends positively, then optimism should eventually return to markets. Even so,
 GLOBAL ASSET ALLOCATION VIEWS

this case would likely take several months to play out, during
which time risk asset markets could well struggle. Moreover,
any sign that a benign “soft landing” was under threat would
likely weigh on markets. Simply put, the risk-reward calculus
has shifted slowly but decisively over the course of 2018.
As global growth rates come back to trend, we expect renewed
scrutiny on monetary policy. The Fed has followed a seemingly
preordained path of rate hikes for much of 2018, and we expect
hikes to continue, quarterly, until mid-2019. Nevertheless, Fed
speakers are beginning to lay the groundwork for a shift to data
dependency in their rate setting. With other central banks also
withdrawing stimulus and increasing rates, Fed data dependency
may be cold comfort to investors should growth falter and the
market narrative pivot toward a sense that U.S. policy is tight. To
be clear, tighter policy doesn’t imply looming recession. But in
combination with softer growth it makes for a more fragile
economic mix in which business, investor and consumer
confidence may struggle to withstand negative news flow from
issues like trade and geopolitics.
In terms of asset allocation, we reduced stock-bond from a small
overweight (OW) to a small underweight (UW), remain neutral on
credit but with increasing caution on some sectors and are OW
duration and cash—though specifically USD cash. These changes
are a continuation of the increasing caution we’ve voiced over the
course of 2018, but we would acknowledge that the decision to
move from optimism on equities to a more circumspect stance is
a meaningful change.
Within equities, we still favor the U.S. and are skeptical of
eurozone stocks. The U.S. has led throughout this cycle and in
weak markets this autumn failed to outperform, but we believe
the earnings resilience of the U.S. is superior and will be
supportive over 2019. By contrast, political woes are simmering
once again in Europe, recent earnings seasons were lackluster at
best, and valuations aren’t cheap enough to be compelling. In our
view, the same is true in emerging markets, where slower growth
and the higher cost of USD funding both weigh on the earnings
outlook; thus we take emerging market (EM) equity to a small
UW. In fixed income, there is a stark real yield gap between the
U.S. and other regions at all points on the curve, so our cash and
duration OWs really distill down to OWs in U.S. cash and
Treasuries—where ex-ante Sharpe ratios are now well ahead of
those for U.S. stocks for the first time in a decade. Finally, credit
continues to offer reasonable carry, but the fundamentals for
investment grade (IG) credit have deteriorated; U.S. high yield
(HY) is a relative bright spot, but illiquidity risk is an important
consideration late in the cycle.
Over most of the last decade, fading dips in sentiment and adding
risk on market weakness worked well. We are now more inclined
to reduce risk on any bounce in growth expectations or
sentiment, since the constellation of factors that might trigger
another surge in global growth, while not impossible, are, for the
time being at least, implausible.

KEY THEMES AND THEIR IMPLICATIONS

Theme Macro and asset class implications

Global policy
U.S. policy continues to tighten, lending support to USD and U.S. cash; other central banks turning hawkish very gradually
divergence
THEMES
GLOBAL

Supply-side
Wage inflation picking up a little in the U.S., probably keeps Fed on a tightening path leading to flatter U.S. curves
weakness
Widespread
Recent weakness in tech stocks mostly an earnings expectations reset, tech innovation and adoption continue to accelerate
technology adoption
Maturing
MARKETS THEMES

Policy approaching neutral and growth slowing to trend caps upside in U.S. stocks in absolute but not necessarily relative terms
U.S. cycle
DEVELOPED

Europe in the
European growth has slowed back to trend and political risks are increasing; EUR likely supported but equities may still struggle
balance
Japan beyond
Corporate governance improving and BoJ policy remains easy; little scope for further JPY weakness means limited upside for equities
Abenomics

Emerging market
EMERGING

Rising cost of USD funding beginning to weigh on EM momentum; valuations cheap but falling global risk appetite still a headwind
MARKETS
THEMES

convergence

China in transition 2018 growth data so far solid, but response to the ongoing trade dispute is likely to dominate outlook in early part of 2019

Source: J.P. Morgan Asset Management Multi-Asset Solutions; data as of November 2018. For illustrative purposes only.

2 J . P . MO R G A N A S S ET M ANAGEM ENT
 GLOBAL ASSET ALLOCATION VIEWS

Active allocation views

These asset class views apply to a 12- to 18-month horizon. Up/down arrows indicate a positive ( ) or negative ( ) change in view since the prior
quarterly Strategy Summit. These views should not be construed as a recommended portfolio. This summary of our individual asset class views indi-
cates strength of conviction and relative preferences across a broad-based range of assets but is independent of portfolio construction considerations.
Max negative Neutral Max positive

Asset class Opportunity set Change Negative Neutral Positive Rationale

Equities/bonds Global growth reverting to trend more quickly than expected; earnings revisions falling

Duration U.S. yields close to our estimate of fair value; growth concerns offer further support

MAIN Credit Fundamentals poor in IG, better in HY, but illiquidity risk in late cycle a consideration
ASSET
CLASSES Commodities Supply/demand more balanced in energy for 2019; trade a headwind for base metals

Real estate Holding up despite late-cycle environment; supply discipline adds support

Cash Move to OW on U.S., as real yields positive and economic outlook is slowing

U.S. large cap Earnings growth is slowing, but quality of earnings and valuations remain supportive

U.S. small cap Domestic growth reverting to trend; boost from tax and fiscal stimulus fading

Europe ex-UK Economic growth moderating, ECB set to turn more hawkish, and EPS revisions weak
EQUITIES

UK Defensive market with attractive yield and valuation, but Brexit clouds outlook for now

Japan Cash distribution improving, but slowing global growth a headwind for Japan cyclicals

Asia Pacific ex-Japan Australia fundamentals weak, but sector mix is defensive; HK geared to slowing growth

Emerging markets Inexpensive but not cheap enough to offset pressure on earnings from trade and USD

Direct real estate Late cycle for real estate; returns holding up, but prefer to take risk in U.S. stocks
ESTATE
REAL

U.S. REITs Some support if U.S. rates remain in check; valuation support less clear-cut now

U.S. Treasuries Positive real yields along most of the curve; rates may rise a little, but carry is good
PREFERENCE BY ASSET CLASS

U.S. TIPS Recent jump in nominal yields led by real rates; offers protection if breakevens catch up
SOVEREIGN FIXED INCOME

Euro, core (Bund) More hawkish ECB and resolution of Italian political risks likely mean higher Bund yields

Euro, periphery (BTP) Significant political risk over the Italian budget suggests a neutral stance

UK Gilts Brexit outcome unclear; risk-off if no deal supports Gilts vs. BoE hikes if a deal is done

Japanese JGBs Yield peg widened but still in place; yields anchored a little above zero for 10-year JGBs

Canadian gov’t bonds BoC hikes likely fully priced; lack of catalysts for underperformance

Australian gov't bonds Trading under USTs, but inflation and growth outlook remain muted

Investment grade Outlook deteriorating and BBBs are especially concerning; leverage at 25-year highs

U.S. high yield Recent rise in spreads offers some valuation support, but credit cycle quite mature
CREDIT

European high yield Spreads widened over 2018, but end of ECB CSPP support a headwind for EU credit

Emerging markets debt Attractive spreads vs. U.S. HY, but global growth concerns a persistent headwind

USD Scope to decline modestly in trade-weighted terms, but likely still supported vs. EMFX

EUR ECB ending QE lends support, while political risks and slower growth are a drag
FX

GBP Highly sensitive to Brexit outcomes; GBPUSD < 1.20 on no deal, upper 1.30s on a deal

JPY Autumn’s risk-off tone failed to send JPY higher; scope to rally if sentiment worsens

Source: J.P. Morgan Asset Management Multi-Asset Solutions; assessments are made using data and information up to November 2018. For illustrative purposes only.
Diversification does not guarantee investment returns and does not eliminate the risk of loss. Diversification among investment options
and asset classes may help to reduce overall volatility.

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 PORTFOLIO INSIGHTS

MULTI-ASSET SOLUTIONS NEXT STEPS

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Multi-Asset Solutions’ asset allocation views are the product of a rigorous and disciplined process
that integrates:
• Qualitative insights that encompass macro-thematic insights, business-cycle views and systematic
and irregular market opportunities
• Quantitative analysis that considers market inefficiencies, intra- and cross-asset class models,
relative value and market directional strategies
• Strategy Summits and ongoing dialogue in which research and investor teams debate, challenge
and develop the firm’s asset allocation views

As of September 30, 2018.

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