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JP Morgan Global Markets Outlook and Strategy 20110406

JP Morgan Global Markets Outlook and Strategy 20110406

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Global Markets Outlook and Strategy
Global Asset Allocation
April 6, 2011
www.morganmarkets.com
The certifying analyst is indicated by an
AC
. See page 35 for analyst certificationand important legal and regulatory disclosures.
Contents
Economic Outlook 2Market Forecasts 6Global Market Strategy 7Top Assets to Own, and to Avoid 12FX Strategy 15Fixed Income Strategy 20Credit Strategy 23Equity Strategy 26Commodity Strategy 29
Jan Loeys
AC
(1-212) 834-5874jan.loeys@jpmorgan.com
Bruce Kasman
(1-212) 834-5515bruce.c.kasman@jpmorgan.com
John Normand
(44-20) 7325-5222john.normand@jpmorgan.com
Nikolaos Panigirtzoglou
(44-20) 7777-0386nikolaos.panigirtzoglou@jpmorgan.com
Grace Koo
(44-20) 7325-1362grace.x.koo@jpmorgan.com
Seamus Mac Gorain
(44-20) 7777-2906seamus.macgorain@jpmorgan.com
Matthew Lehmann
(44-20) 7777-1830matthew.m.lehmann@jpmorgan.comJ.P. Morgan Securities Ltd.
The economy
The global economy disappoints bullish 1Q expectations in the face of numerous negative shocks, but despite 3/4%pt downward revision to 1Hglobal GDP growth, recovery to stay above trend and accelerate in 2H.
Asset allocation
Markets are interpreting all weak economic data as part of a V-shapedmove down then up due to Japan. But higher oil and weaker US consum-ers are real threats. We stay medium-term long risk assets, but reduce theoverweight from aggressive to significant, taking instead more tacticalrisk from within-asset class positioning on relative value and growth.
Top assets to own, and to avoid
OW alternatives and UW govt bonds in a long-only portfolio with a targetvol of 12%, i.e. market portfolio vol. HFs, Private Equity and Real Estatehave low Marginal Contribution To Risk (MCTR), even after “de-smooth-ing” their historical return series. In a low 6% vol portfolio, we recom-mend high exposure to Hedge Funds, HG corp bonds and Real Estate.
Fixed income
Hold shorts and flatteners in the UK and Euro area in anticipation of policy tightening. Overweight US vs. Canada on monetary policy, andNew Zealand vs. Australia on carry. Position for wider swap spreads inGerman Bunds vs. US Treasuries.
Credit
Reduce directional exposure by closing longs in CLOs, but maintain longsin HY corporates and top quality US CMBS. OW US Banks vs. Industrialsand open underweight in Asian versus US corporates in CDS indices asAsian corporates face stronger headwinds in the near term.
Equities
Move to an OW in EM vs. DM equities as both positions and the IPgrowth differential favour EM. UW Cyclical vs. Defensive sectors on aprospective slowing in the global PMI. Sector momentum favoursCommodity sectors and Telecoms. Stay long small vs. large caps.
Currencies
Relative growth, monetary policy and debt dynamics are our guides. Stayshort USD vs. CAD, EUR and EM. Short EUR and GBP vs. CHF, SEKand NOK.
Commodities
We stay long commodities on a longer term view but focus on relativevalue for the near term.
 
2Global Markets Outlook and Strategy
April 6, 2011
JPMorgan Chase Bank
David Hensley (1-212) 834-5516david.hensley@jpmorgan.comCarlton Strong (1-212) 834-5612carlton.m.strong@jpmorgan.com
Economic Research
Global Economic Outlook Summary
Source: J.P. Morgan
Note: For some emerging economies, 2010-2012 quarterly forecasts are not available and/or seasonally adjusted GDP data are estimated by J.P. Morgan.
Bold denotes changes from last edition of
Global Markets Outlook and Strategy,
with arrows showing the direction of changes. Underline indicatesbeginning of J.P. Morgan forecasts.
2010 2011 2012 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 4Q10 2Q11 4Q11 2Q12The Americas
United States
2.9
2.9
2.9
2.6
3.1
2.5
3.5
3.5 3.0 2.0 1.2
2.8
2.5
1.6
Canada 3.1 3.3 3.0 1.8 3.3 4.0 3.6 3.5 3.3 2.7 2.3 2.4 1.9 2.0Latin America 6.1
4.4
3.8
2.5
4.5
3.7
5.5
4.0
4.1
3.3
6.7
7.0
7.5 7.6Argentina
9.2
6.5
4.8
2.7
10.5
6.5
5.0
6.0
3.0
4.0
11.0
11.0
11.0
12.0Brazil
7.5
4.0
3.8
1.6
3.0
3.9
4.8
4.9
4.6
4.0
5.6
6.0
6.1
6.2Chile
5.2
6.0 4.5
8.7
3.8
4.5
5.0 5.0
5.0
4.5 2.5
4.0
5.5 5.0Colombia
4.3
4.5 4.0
-1.9
7.9
6.0
3.8
3.7
4.2
4.5
2.7
3.6
4.0
3.4
Ecuador 
3.6
3.5 3.0
8.4
11.0
3.0 2.5 2.5 2.0 3.5
3.4
3.5 3.8 3.6Mexico 5.5 4.5 3.5 3.2 5.1 2.0 8.0 2.5 3.6 1.5 4.2 3.6 3.7 3.6Peru 8.8 7.3 6.0 7.2 8.6 6.8 7.0 4.5 6.7 6.5 2.1 2.9 2.8 2.8Venezuela -1.4 1.5 3.0 0.6 -1.8 2.5 1.5 2.0 2.5 3.0 27.3 29.0 33.8 34.6
Asia/Pacific
Japan 4.0
0.8
3.2
3.3
-1.3
0.5
-3.5
5.0
6.5
3.0
0.1
0.8
0.8
0.8
Australia 2.7
2.6
4.5
0.5 3.0
-0.3
4.8
4.1
5.2
5.1
2.7
3.4
3.6
3.2
New Zealand
1.5
0.6
4.4
-0.8
0.8
-1.9
1.2
4.4
3.4
5.7
4.0
5.8
3.9
3.1
Asia ex Japan 9.1
7.4
7.6
7.3
7.9
7.5
6.9
8.6
7.3
7.1
4.9
5.4
4.4
3.9
China 10.3
9.4
9.0 9.9 12.7
8.7
8.8
9.0
9.0
9.3 4.7 5.1 3.3 3.0Hong Kong 6.8
4.7
4.7 3.6 6.1
4.1
4.2
4.8
5.0 4.8 2.8
4.3
4.6
3.6
India 8.5
8.0
8.7
13.5
0.9
7.9
8.4
13.2
5.8
5.0
9.2
8.5
8.5
8.0
Indonesia 6.1
6.0
6.7 6.7 7.5
6.0
5.0
4.5 5.0 7.0 6.3 7.2 6.3 5.5Korea
6.2
4.2
4.7
2.6
2.0
5.0
3.4
6.5
5.8
4.0 3.6
4.7
3.5
2.8
Malaysia 7.2
4.7
4.8
-0.6 8.9
5.2
2.0
6.5
5.0
5.5 2.0 3.4 3.7 3.0Philippines 7.3
5.0
5.1
-3.1 12.7 4.9
3.6
5.3
4.5
5.3 2.9
4.9
5.1
3.5
Singapore 14.5
4.1
5.7
-16.7 3.9
5.3
7.0
8.2
6.6 4.9 4.0
4.5
3.3
2.0
Taiwan 10.8
4.5
5.4 3.2 0.0
8.0
4.6
6.0
6.5
5.5 1.1 1.8 2.9 2.1Thailand 7.8
3.6
4.8 -1.3 4.8
6.5
1.0
6.5
5.5 4.5 2.9
4.5
5.4
4.5
Africa/Middle East
Israel
4.6
4.5 4.0
4.6
7.7
4.5 4.5 4.5 4.5 4.5 2.5
4.9
3.8
3.5
South Africa
2.8
3.7 3.8 2.7 4.4 3.6 3.7 4.0 4.1 3.0 3.5 4.2 5.9 5.8
% over a year ago
Consumer prices
% over previous period, saar 
Real GDP
% over a year ago
Real GDP
Europe
Euro area 1.7
2.2
2.2
1.4
1.1
3.0
2.0
2.0 2.5 2.3 2.0
2.5
2.4
1.8
Germany 3.5
3.3
2.2 2.8
1.5
4.5
2.5
2.5 2.5 2.0 1.6
2.3
2.3
1.8
France 1.5
2.3
2.4
1.0
1.4
3.5
2.0
2.5 3.0
2.3
1.9 2.1
2.2
1.8
Italy
1.2
1.4
2.1
1.3
0.5 1.5
1.5
2.0 2.5 2.5 2.0
2.5
2.5
2.2
Norway 2.2
2.9
2.9
4.4 1.3
3.3
3.3
3.0
3.0 3.0 2.2
1.1
0.9
0.9Sweden 5.3
4.6
2.9
8.7 5.1
3.5
3.3
3.0
3.0 3.0 1.9
3.1
2.9
2.4
United Kingdom 1.3
1.8
2.7
2.9
-1.9
2.8 2.0 2.5 3.0 2.5 3.4
4.4
4.5
3.1
Emerging Europe
4.5
4.3
4.5
0.6
7.1
3.9
3.0
4.0
5.2
4.9
6.6
7.3
6.8
6.0Bulgaria 0.1 3.5 4.0 Czech Republic 2.3 3.0 3.5
3.6
1.4
1.5 3.0 3.5 4.0 3.5 2.1
2.2
2.9
2.7
Hungary 1.2 2.8 3.5
2.2
0.8 2.5 3.0 3.5 3.5 3.5 4.4
4.3
4.2
3.7
Poland 3.8 4.0 4.2 4.9 3.2
4.5
3.5
4.0
4.0
4.2 2.9 4.0
3.7
3.0
Romania
-1.3
2.0 4.0 7.9
7.3
4.8
5.0
Russia 4.0 4.5 5.0
-1.1
10.8
4.5
2.8
4.2
6.0
5.5
8.2
10.1
8.9
7.6
Turkey
8.9
5.6
4.3
… 7.4
6.3
6.8
6.5
Global
3.8
3.3
3.6 3.0
3.0
3.3
3.0
4.1
4.1
3.3
2.7
3.5
3.3
2.7
Developed markets 2.5
2.3
2.7
2.3 1.5
2.4
2.0
3.1
3.4
2.4
1.6
2.5
2.4
1.7
Emerging markets
7.3
6.0
6.0
4.9
6.9
5.9
5.9
6.6
6.1
5.7
5.6 6.1 5.6
5.2
 
3Global Markets Outlook and Strategy
April 6, 2011
Economic Research
Economic Outlook
Global economy disappoints bullish 1Q expectations inthe face of numerous negative shocks.
Despite 3/4%pt downward revision to global GDPgrowth in 1H, recovery to stay above trend andaccelerate in 2H.
MENA unrest and oil prices remain the key near-termrisk; consumer resilience in 2Q to be tested.
Fed and BoJ continue easing as ECB joins EM centralbanks in heading for the exit.
Global recovery resilient amid shocks
The devastating earthquake and tsunami in Japan this monthadd to an unusual array of shocks already buffeting the globaleconomy in the first half of 2011. These include a spike in oilprices amid social unrest in the MENA region, an ongoingsurge in agriculture prices, severe winter weather in the USand Europe, Lunar New Year holiday disruptions in China,and simmering tensions surrounding the EMU fiscal crisis. Assome drags have persisted longer than expected and new oneshave come on the scene, they have both raised the level of uncertainty about the outlook and tempered our baseline fornear-term growth. These near-term disappointments are all themore so given that our view of robust growth into the newyear was being amplified by what were risks to the upside. Asof now, the risks are skewed more to the downside.The past month has brought a stream of downward revi-sions. Relative to the March
GMOS
, our forecast for globalGDP growth in the first half has been marked down by3/4%-point annualized. Revisions have centered on the USand Asia. In response to the oil price shock and somewhatweaker than expected consumer spending data, we now look for US GDP to post a 3% gain in 1H11, 3/4%-point weakerthan in the last
GMOS
. In Asia, the Tohoku earthquake willdo considerable damage to growth in Japan and leave anoticeable imprint on activity in the rest of region. GDPgrowth in Japan is now expected to contract 1.5% annual-ized in 1H11, a downward revision of nearly 4%-pointssince the last
GMOS
. First-half output growth in EM Asiahas been marked down roughly 3/4%-point over the sameperiod, but further revisions are likely as the full extent of the earthquake is assessed.Despite the sizable downward revisions to our outlook and theshift in risk distribution to the downside, we maintain that theglobal recovery will be resilient this year. Indeed, as we assessthe likely impact of these supply and geopolitical shocks onnear-term growth, it is important to recognize that most, if not
JPMorgan Chase Bank
Bruce Kasman (1-212) 834-5515bruce.c.kasman@jpmorgan.comDavid Hensley (1-212) 834-5516 Joseph Lupton (1-212) 834-5735david.hensley@jpmorgan.com joseph.p.lupton@jpmorgan.com
Source: J.P. Morgan
2.53.03.54.04.55.0
,
2005 2006 2007 2008 2009 2010 2011Previous GMOS forecast
Trend growth
Chart 1: Real global GDP
 
%q/q, saar 
all of them, will prove to be temporary, and that they are occur-ring against a backdrop of very strong fundamental supportsfor growth. Although industrial production is set to deceleratethis quarter, this is from a robust pace in 1Q11, and the pur-chasing-power hit to consumption from higher oil prices is be-ing cushioned by improving labor markets, a 17% advance inglobal stock prices since September and the reduction in socialsecurity taxes in the US. Moreover, the soft spots in the globaleconomy, including the service sector, the Euro area outside of Germany and Japan, are all showing signs of improvement.Even with the cuts we have made to the forecast so far, thenear-term outlook is still for global output to expand at anabove-trend pace of 3.2% annualized in the first half of 2011,with a 3.3% gain in 1Q11 followed by a 3% gain in the currentquarter. The latest global PMI reading confirms our view, bothof above-trend growth at the turn of the year as well as a mod-est deceleration into the current quarter. Put differently, theshocks to date would have to magnify considerably to pushglobal growth below this trendline.
Watching oil and the consumer
Our biggest immediate concern remains the oil shock and po-litical turmoil in the Middle East and North Africa. Oil shockscan affect the economy through two channels: the hit tohousehold purchasing power and a loss of confidence and risk appetite that undermines asset prices. To date, this shock hasproved manageable because the hit to purchasing power,while significant, has not been big enough to stifle growth inreal income, and because it has not spilled over to confidenceand asset prices. However, this view will be tested in the com-ing weeks as oil prices have begun moving up further, withfront-month Brent trading above $120/bbl. Our energy strat-egy team anticipates that although there will be an unusualamount of volatility in global oil prices in coming weeks, thelevel of prices will be moving lower by midyear.There is little doubt that the spike in energy prices is dampingspending behavior. According the latest readings, global retailsales volumes decelerated over the last quarter. Some of thiswas anticipated following the strong gains in 4Q10. Conse-quently, it remains to be seeing how households respond to the

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