Global Markets Outlook and Strategy
Global Asset Allocation
April 6, 2011
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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
Seamus Mac Gorain
(44-20) firstname.lastname@example.orgJ.P. Morgan Securities Ltd.
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.
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.
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.
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.
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.
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.
We stay long commodities on a longer term view but focus on relativevalue for the near term.