“Overweight In Stocks; Stay Long Duration In Bonds”: JPMorgan

By Mani
Updated on

As bonds are benefiting from continued easy money, JPMorgan analysts prefer to stay long duration in their global portfolio and remain overweight Europe vs U.S. equities on divergent economic momentum.

Jan Loeys and team at JP Morgan in their April 3, 2015 research report titled: “What lessons from Q1?” highlight that they are underweight in UK equities as the country approaches elections.

Overweight in stocks

The JPMorgan analysts point out that equities and bonds both performed quite well last quarter, with equities clocking 5% before currency effects and most bond indices gaining 2-3%. They note YTD EM equity funds witnessed $14 billion of outflows, and the gap in corporate profit margins between DM and EM remains wide as profit margins continue to drop for EM corporates.

The analysts point out that this trend keeps them away from a broad EM equity exposure, though they stay selectively long in India and Indonesia in Asia where they see the most upside.

Turning their focus to Japan, Loeys et al. note factors other than the yen are now beginning to have a greater impact on the earnings outlook, including a greater focus on return on investment by corporate managers. The analysts are overweight long in Topix vs MSCI Latam. They also maintain overweight Europe Vs US on divergent economic momentum.

As the country approaches the elections, the analysts anticipate more downside in UK. They note there are increasing indications that the politics would be quite challenging and they don’t find that the markets are pricing much of that in. The JP Morgan analysts are underweight UK stocks.

Stay long duration in bonds

Jan Loeys et al at JP Morgan note that thanks to continued easy money, bonds have benefited and they suggest stay long duration.

Moreover, the dovish message from the FOMC’s interest rate projections a few weeks ago has pushed the analysts to close their 5s/30s US Treasury curve flattener this week, as they anticipate limited prospects for flattening in the near term, while the position suffers from a negative carry of 10 bp over 3M.

The analysts also point out that near-term support from the mixed economic outlook and ECB and BoJ QE, and longer-term support from continued balance sheet repair and weak productivity, all come together to make them retain their long duration bias via a long position in the JPM GBI Global Index.

Global bonds yield

Turning their focus towards credit, the JPMorgan analysts point out their US HG index yield at 3.5% is almost double that of their UST index. They note that in a break from last year’s trend, they are overweight in credit, as they anticipate the yield ratio effect dominating, but also as a hedge in case bonds sell off.

As regards FX, they point out that with weak data likely removing impetus for a dovish Fed, they suggest holding USD against other currencies with special weakness. Taking a deep dive into oil, the analysts point out that global oil demand is also seasonally stronger in H2, which should help absorb the market surplus from H1. Accordingly, the analysts have raised their Brent price forecasts to $59 in late 2015 and $62 by year-end 2016.

The chart below provides forecasts across various products:

JPM Forecasts bonds

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