JPMorgan Looks at What Can Help Boost 2019's Less-Loved Markets
(Bloomberg) -- The year 2019 has been pretty good for securities markets. So good, that assets with returns which would be impressive in another year are being overlooked.
Japan’s Topix equities index, for example, is up 7.5 percent, yet it’s in the shadow of the S&P 500’s 17 percent gain. Behind the year’s remarkable performers -- like global high-yield bonds, returning 7.2 percent -- there are many poor showings, like gold.
JPMorgan Chase & Co. clients have been wondering if lower-performing assets are due to catch up with the pack, its head of cross-asset fundamental strategy John Normand said in an April 12 note, so he examined what would need to occur to goose returns for some of the laggards.
Japan equities would need a bullish outlook on global manufacturing. That’s possible if President Donald Trump eventually lowers tariffs on China, according to the strategist. A stronger dollar versus the yen would also help, though that’s unlikely with the Federal Reserve looking to stay on hold for interest rate hikes well into 2020, Normand added.
To favor European stocks, investors would need a bullish view on European growth, a bearish view on bund yields and a bullish view on Italian sovereigns, he said -- all of which JPMorgan has forecast. The underperformance of the Argentine peso highlights concern about the outlook for fiscal consolidation after October 2019, if President Mauricio Macri isn’t re-elected or succeeded by a moderate, Normand said.
For the euro, while the problem is the region’s challenges in returning to above-trend growth and near-target inflation, Normand said it’s possible catalysts for both currencies could come in the second quarter of the year. Among commodities, gold has been an underperformer as it has barely risen against the dollar.
“Given that lower real rates are part of the Fed’s strategy to run a hotter economy, we think gold’s uptrend has stalled temporarily rather than ended for the cycle,” Normand said.
Then there’s volatility, the “least-loved” market of all, according to Normand, who says implied levels are below the fifth percentile for half of assets.
“Even though macro models suggest that vols are abnormally low,” Normand wrote, “these multi-quarter undershoots are common during Fed pauses and typically require a rates rethink or geopolitical shock to revive.”
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