Financial Markets: Big Unknowns, Big Implications
J.P. Morgan Asset Management’s «Guide to the Markets» provides client advisors and professional investors with targeted support for making the best investment decisions.
Balance of Risks For the Global Economy is Shifting
Our core economic scenario is little changed relative to the start of the year, with US growth moderating and European growth accelerating modestly, causing the gap in growth between the regions to narrow (Guide to the Markets – Europe pages 4, 34). The balance of risks around this view is, however, shifting.
For much of the first half of 2024, the risks were skewed to the upside – more consistent with «no landing» and sticky inflation, than «soft landing» (page 7). The balance of risks is now more even, if not slightly skewed to the downside (pages 14, 18, 27).
Core Bonds Are Diversifying
Fortunately, as growth is coming off the boil so is inflation, giving central banks room to pre-emptively ease off the brake (pages 20, 33). Core bonds should therefore act as a shock absorber if data deteriorates further (page 67). We have more conviction in extending the duration of European core bonds than the US.
Within credit, we prefer the higher duration and credit quality of investment grade over high yield (page 65). Strategically, we still advocate building larger positions in alternatives to insulate from the structural presence of inflation and fiscal risks in the coming decade (pages 21, 77).
Shifting Gears in Equity Performance
The long-anticipated broadening out of US corporate earnings is finally underway, yet valuation dispersion in the stock market is still extremely wide (pages 54, 55). As earnings growth becomes more evenly distributed across sectors, this could also support a regional rotation and a reduction in the discounts of some less-loved equity markets around the world (pages 46, 49).
Big Unknowns, Big Implications
The US election, broader geopolitical events, the evolution of artificial intelligence (AI), and the unwinding of the Japanese carry trade could all have significant implications for markets (pages 24, 39, 63).
This summer’s volatility has demonstrated the importance of a well-diversified portfolio, and investors should be prepared to withstand further pockets of volatility ahead (pages 66, 97).
