1、Rough politics,regime change,Japanization&constrained marketsMid-year cross-asset outlook& NormandACHead of Cross-Asset Fundamental Strategy(44-20)7134-J.P.Morgan Securities plcSee the end pages of this presentation for analyst certification and important disclosures.Cross-Asset Strategy13 June 2019
2、1Rough politics,regime change and JapanizationSeveral markets have delivered above-average returns this year(DM Equities,DM&EM Credit),mostly via an extraordinary Q1,when the dominant macro themes were a US/China trade truce,a dovish Fed and a tightening Oil market.By contrast Q2 has brought mostly
3、defensiveness and retracements as Trump resumed and broadened the trade war,thus making Bonds,Gold and a few S&P sectors(Real Estate,Utilities,Staples)the best-performing assets in early summer(slides 2-3).This presentation and podcast discuss four macro and policy themes that are unfolding at diffe
4、rent speeds but which will influence markets in H2 2019 and into 2020.They are(1)Trumps unfinished trade,technology and budget wars(slides 7-18);(2)Fed rate cuts as part of standard risk management and a once-in-a-generation regime change(slides 20-29);(3)broader Japanization across regions,markets
5、and sectors(slides 31-34);and(4)late-cycle dynamics now catalyzed by geopolitics rather than a restrictive Fed(slides 36-42).H2 will,in our view,be shaped mainly by the tension between President Trumps attempts to deliver on campaign promises and the Feds efforts to offset the growth consequences of
6、 his spoilers.A less-aggressive White House and a more activist Fed can prevent 2019 from delivering the first man-made recession in history,but something more structural would be required to prevent further Japanization of global fixed income markets(including Bond,G10 and Gold volatility)and some
7、equity sectors.As this record-long expansion enters its tenth year,it is still useful to monitor late-cycle hallmarks(macro imbalances,excess leverage,low risk premia),but also to recall that vulnerabilities require catalysts to deliver a recession and justify defensive asset allocation for more tha
8、n a few months.Over the past 50 years,a restrictive Fed and/or an oil shock has driven the transition from late cycle to end-of-cycle in the global economy and in markets.A looser Fed and oil market now are reasons to be hopeful.But if one wants a precedent for how a trade war contributed to a reces
9、sion(actually,a depression),turn the calendar back to the 1930 Smoot-Hawley tariffs.Because Fed and China easing can probably offset the impact of current tariffs eventually and prevent a 2019 recession,asset allocation remains cyclical via a moderate OW of Equities vs Fixed Income.But we hold Equit
10、ies vs Credit rather than Bonds to reduce beta to the global business cycle,and we hold no net exposure to EM(short EM FX,long duration,neutral Equities and Sovereign/Corp Credit).Risk-adjusted returns above average only in Bonds/Credit Rolling 12-mo return-to-volatility ratioSource:J.P.MorganThe ta
11、ctical overlay is quite defensive,however,via long Gold and long USD and JPY vs EM Asia,commodity FX and GBP(slide 44).The hedges reflect a few factors:(1)unknowns around the end-point on tariffs,their impact on growth/earnings,and the effectiveness of Fed policy against them;(2)the lack of much ris
12、k premia across the majority of cyclical assets if growth slips further below trend in Q3&Q4(slides 10-12);and(3)the patchiness of defensive positioning across a range of futures,survey,hedge fund beta and ETF-based indicators(slide 13).-2-1012345S&P500NasdaqRussell 2000TopixMSCI EMUMSCI World(lcy)M
13、SCI EM(USD)GBI Global(lcy)US HG CreditUS HY CreditEuro HG CreditEuro HY CreditEM SovereignsEM Local(USD)EM CorporatesEM FXCommoditiesUS linkersEuro linkersUK linkersMacroSystematicEquity L/SValueGrowthpast 1Y20Y average2018EquitiesReal assetsBonds&CreditHF Styles&Equity FactorsClick icon for an audi
14、o summary of key slides in this presentation2-600123334444556666667777789991012131416161824-10-5051015202530MSCI Turkey($)MSCI Korea($)USD trade-wtdUSD 3M cashEM FX(ELMI)Euro linkersJGBsGerman BundsItalian BTPsEuro HG CreditGBI GlobalUS TreasuriesCommoditiesUS linkersUS Lev LoansTopixMSCI EM(in$)Eur
15、o HY CreditEM Bonds(GBI-EM)MSCI S.Africa($)MSCI China($)Spanish BonosMSCI Mexico($)EM CorporatesUS HG CreditMSCI India($)US HY CreditMSCI Brazil($)EM SovereignsFTSEMSCI EMUMSCI ACWIRussell 2000Australia Equities(ASX 200)S&P500NasdaqMSCI Russia($)2019 cross-asset returns:Almost everything was earned
16、in Q1 2019 year-to-date returns and implied volatility by asset class Total returns in local currency unless noted otherwiseSource:J.P.MorganHuge dispersion in returns,with EM generally lagging DM for a second-consecutive year.0%15%30%45%60%75%90%US Rates(3Mx10Y)Euro Rates(3Mx10Y)Japan Rates(3Mx10Y)
17、G10 FXEM FXOilCopperGoldUS HY CreditUS HG CreditUS Equities(VIX)Euro Equities(V1X)Japan Equities(VNKY)Jan 1stCurrent5th percentileEven after Mays turbulence,vols remain near historic lows in G3 Rates,G10 FX and Gold.3-16-9-6-6-5-3-2-2-1-1-1-1-1-1-1-10000000111122347-18-16-14-12-10-8-6-4-2 02468ARSTR
18、YSEKKRWZARTWDHUFEURPLNNZDCZKCOPAUDCHFNOKMYRGBPCNYMXNSGDBRLCLPJPM USD indexINRIDRPENJPYPHPCADTHBILSRUBEquity sector/style,currency and commodity returns in 2019Cumulative returns by US equity sector/style,currency and commodity in 2019Total return for equities,spot return for currencies and excess re
19、turn for commoditiesSource:J.P.MorganCurrenciesCountry-specific influences persist in a year when a tension between dovish Fed and disruptive geopolitics keeps trade-wtd USD in a range.CommoditiesSupply conditions and Chinas investment slowdown have created significant dispersion.US equity sector/st
20、yle Neither Cyclicals nor Defensives dominates consistently.-16-10-9-6-5-5-5-5-1233355710101111151619212338-20-1001020304050Natural GasCottonCoffeeSoybeansSilverLeadAluminumCattle(Live)CopperPlatinumWheat(Chicago)LumberGoldCocoaSugarZincCornHeating OilNickelGas OilPalladiumWTIBrentCoking coalGasolin
21、eIron ore0571214141515151616171818191921240102030Metals&MiningHealthcareEnergyUtilitiesMaterialsValueCommunicationsFinancialsBuybacksCons StaplesS&P500IndustrialsGrowthCons DiscretionaryQualityMomentumReal estateTechnology4Global MarketsGlobal Economics&PolicyGrowthGlobal growth marked down to sligh
22、tly below trend rate of 2.5%on trade war 2.0,but with downside bias given how last years tariffs delivered much greater-than-expected collapses in business confidence,manufacturing PMIs and capexNegative wildcards:(1)contagion from manufacturing to services/labormarkets;(2)supply-driven spike in oil
23、 prices;(3)revival of negative feedback loop from politics to asset prices to consumer/business spending;and(4)limited transmission mechanism from Fed/China easing to spending given leverage overhangs in US and Chinese corporate sectors.Positive wildcard is possibility of a negotiated agreement incl
24、uding tariffs rollback in late 2019,ahead US elections.Recession risks:40%odds of beginning in next year on JPM Economics recession risk modelInflationFirmer US core PCE on tariffs(1.8%by Q4 2019,2.1%by mid-2020),but still too low for a Fed thats moving to an average inflation target.This is hardly
25、stagflation.Euro area core stuck 1%and Japan 0.3%.PolicyCuts in H2 2019 from Fed(-50bp),PBoC(two RRR cuts),RBA(-25bp),RBNZ(-25bp),India(-25bp)and Indonesia(-50bp).Possible hikes from Mexico(+50bp).Geopolitics Trade:No further tariff hikes on China given feedback loop to US economy.Little confidence
26、on this view and on durability of Mexico and EU truces given Trumps fondness for this tool.Oil:low odds of spike on Iran/Vene sanctions given weakening demandOther:Italian fiscal policy,hard Brexit,US debt ceiling/spending capsCore views for H2 2019:Rising recession risks,incomplete pricingPosition
27、for another growth slump,not a recession 2019s tariffs risk triggering a recession by taxing consumers and corporate when global growth and corporate profits were already mediocre due to 2018s conflictA man-made recession driven by Trumps foreign policy would be a historic first compared to previous
28、 ones catalysed by Fed policy and/or oil shocks.Trumps incentives to re-think his foreign policy before his approval rating/US Equities drop too far constrain our willingness to forecast a recession.But no one knows his pain thresholds;and no one can calibrate the macro impacts of untested policies
29、like trade and technology sanctions Hence,the role of fear and complacency indicators in guiding strategy(1)Valuations:most markets are not cheap when valued relative to global growth;neither are most cheap when valued by market-specific measures like forward P/Es or credit spreads;(2)Positioning/ET
30、F flows:positioning measures based on futures data,hedge fund betas and JPM client surveys are mixed,with few showing extreme defensive exposure;ETF data indicate limited liquidations since May,particular in EM(3)Volatility:now slightly below fair value;and (4)Market depth:below average,due to US Eq
31、uities Asset allocation is moderately cyclical given FICC hedges:Average OW of Equities funded in Credit;neutral DM duration;neutral EM complex overall(short FX,long duration,neutral MSCI EM,EMBIG&CEMBI);long USD and JPY vs EM and G10;long Gold.AgendaPageTrumps unfinished trade,technology and budget
32、 wars6Broader Japanization across regions,markets§ors30Late-cycle dynamics catalyzed by geopolitics rather than the Fed35Cross-asset forecasts,strategy&wildcards 43Feds standard risk management plus a rare regime change196Source:J.P.Morgan Why cant we all just get along?The US-China-is-the-new C
33、old-War analogy understates the much greater market significance of the US/China conflictThe Soviet economy was smaller(3%of global GDP)and less integrated into the global economy(it traded mainly with other communist countries).China accounts for about 15%of global GDP and 16%of global exports acro
34、ss a much wider range of products.The US and China are each others largest trading partners.US-Soviet conflict was an ideological and military one with enormous political and social consequences,but influenced global markets little except for one-in-a-generation flashpoints like the Cuban Missile Cr
35、isis(1962)or the collapse of communism(1989-91).US view of Chinas practices from USTR report to Congress on Chinas WTO compliance(Feb 2019):Unfair“Continued embrace of state-led,mercantilist approach to economy and trade”included forced technology transfer,market access restrictions,and industrial s
36、ubsidies“Consistent patternwhere US raised a concern,China has promised to address,and promise has not been fulfilled.”China view of US allegations and demands from China State Council white paper on trade(Jun 2019):Untrue&unrealistic“Chinas achievementsare not something we stole or forcibly took;th
37、ey were earned”China“has established a legal system for the protection of IP that is consistent with prevailing international rules and adapted to domestic conditions”US turns“blind eye to nature of economic structure and stage of development of US and China,as well as the reality of the internation
38、al division of labor”“The more the US government is offered,the more it wants”Chinas conditions for a trade deal:removal of tariffs,realistic targets for Chinese purchases of US goods,and negotiations based on mutual respect(where respect,presumably,refers to a countrys development path and institut
39、ions).How long does the conflict persist is a different question from how long it impacts markets?The duration question depends a lot on personalities.The impact question depends on the level at which valuations/risk premia reset to reflect weaker trend growth,slower earnings and less innovation tha
40、t would have prevailed in an environment of freer trade and investment.That repricing in still in motion,in part because trade and investment policies are being rethought constantly.New Cold War analogy understates economic&financial significance of US/China conflict From vsTovs7Trumps trade and tec
41、hnology warsSource:J.P.Morgan,Real Clear Politics Tariffs still damaging confidence and tradeBusiness confidence as sigmas from long-term averageTrumps trade/tech wars risk ending the longest US expansion in post-war history.Although our economists work last fall when full tariffs was JPMs baseline
42、scenario suggested limited impacts to GDP as long as China eased policy,the surprise late last year and early this year has been the extent and persistence of such weak readings on most of these indicators.So restarting the conflict from a worse initial position risks a further(and perhaps non-linea
43、r)decline in global industry,contagion to the resilient services sector and labor markets and,at some point,a more intense tightening of financial conditions as markets begin pricing higher odds of a global recession.It is true that additional policy supports like further China easing and possible F
44、ed rate cuts could break this feedback loop,but these responses would be more reactive than pre-emptive.Chinas response might be more limited than last year(see Trade war(what is it good for)by Lupton from May 17th).Trump has incentives into 2020 elections to engage China/Mexico/EU,but his pain thre
45、sholds are unknowable,and the risk of miscalculation is high when using untested tools so capriciously and widely.-50%-30%-10%10%30%50%-3-2-1012302 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19G4 business confidence(lhs)EM business confidence(lhs)global export growth,yoy(rhs)Trump eraTwo pain p
46、oints:Trumps approval rating and S&P500 level Trumps average approval rating across polls vs S&P50041%41%43%36%38%40%42%44%46%48%50%2,200 2,300 2,400 2,500 2,600 2,700 2,800 2,900 3,000Jan-17Jul-17Jan-18Jul-18Jan-19S&P500(lhs)Trump approval rating(rhs)Stormy DanielsGovt shutdownTradewars8Markets sho
47、uld stress more over tech bans than a tariff war Source:J.P.Morgan Flows into rare earths ETFs have surged but from low base Cumulative flows(US$mn)and share price for Rare Earth/Strategic Metals ETF(REMX)of China/AU/US producers Is there is much to distinguish one protectionist policy from another
48、in terms of economic and then market impact?Countries can enact a range of protectionist policies such as tariffs,import quotas,voluntary export restraints and export bans.They differ principally by who bears most of the costs(domestic vs foreign producer and consumers)and whether governments benefi
49、t from higher tax revenues.If quantitative restrictions like export bans resemble tariffs in their inefficiencies but differ by their impact on government revenue,markets should only be more anxious about a tech war under three conditions:(1)the Tech sector in more dominant in the US,Chinese or glob
50、al economies than other sectors;(2)monopoly power in the production threatens hyperbolic changes in prices,as with the Arab oil embargoes of the 1970s;or(3)lack of substitutability threatens unpredictable supply chain disruption.All three variables are in play currently,with the last two the most wo
