Mid-year investment outlook with J.P. Morgan Asset Management
Kevin Lings
STANLIB Chief Economist
Karen Ward
Chief Market Strategist for EMEA
at J.P. Morgan Asset Management
At our most recent webinar, Karen Ward, Chief Market Strategist for EMEA at J.P. Morgan Asset Management and STANLIB Chief Economist Kevin Lings discussed how economic weakness is – unfortunately – needed to get rid of inflation, which may create volatility in risk markets in the second half of the year. Investors should look to focus on quality and income and avoid concentration in portfolios. While bonds can diversify against recession risk that brings disinflation, alternatives can add further diversification benefits.
Key themes from the J.P. Morgan Asset Management Guide to the Markets for 3Q 2023
Too good to be true
Markets have become increasingly optimistic that inflationary pressures will recede even if economic activity remains robust. This expectation that Goldilocks will return has buoyed both stock and bond prices this year, but such a benign scenario seems too good to be true. Central banks will need to maintain their foot on the brake to drive away excess inflation. A recession is still the base case.
Boost resilience
Given the recent rally, neither equity nor credit markets appear priced for a period of economic weakness. Against this backdrop, investors should focus on high quality credit and look to boost the resilience of an equity portfolio via exposure to strong balance sheets, resilient dividend payers and regional diversification. Investors are cautioned against having too much confidence that large cap tech will prove defensive in an earnings recession.
Think more broadly about diversification
Real yields in core government bonds are more attractive than they have been in over a decade. If a recession is accompanied by a quick dissolution of inflationary pressures, core bonds will provide ballast to a portfolio. But 2022 is a reminder that inflation is not dead and can be extremely damaging to the price of stocks and bonds. Alternatives are needed to insulate a portfolio from inflation shocks.
From abundance to scarcity
Although headline inflation will fall further in the coming months, we can expect more inflation volatility as the global economy enters a period in which scarcity of key commodities becomes more apparent and problematic. Key concerns centre on low carbon energy, materials, food and water, and labour markets.
In summary, this will be a very different decade and we are in a new economic regime.