Global Markets Outlook and Strategy, JP Morgan

• The economy
Our 2012 global growth forecast remains at an anaemic 2.2%, but PMIs
are suggesting mild upside risk.

• Asset Allocation
We remain long equities, EM and credit against safer assets. Of the six
drivers of the rally, two are now closer to neutral (positions and risk
perceptions), and one has gained (momentum). We analyse the impact of
high relative supply of safe assets, cash and gov’t debt, and conclude
equities and credit need to rally some 6% over the coming 12 months just
to keep pace with rising cash and gov’t debt outstanding. The portfolio
now includes hedges against oil and inflation.


• Long-only ETF portfolio
We recommend a higher allocation to equities (48%) than bonds (42%).
In equities, focus exposure on ETFs that give exposure to DAX, BRICs,
US Preferred stocks and among sectors to Technology/Industrials/Energy.
In bonds, focus exposure on US HY corporate bond and US TIPS ETFs.

• Fixed income
We hold modest tactical shorts in DM, and select longs in EM local markets,
Poland and South Africa. Position for tighter Euro area peripheral
spreads, wider inflation breakevens, and a steeper AUD front-end curve.

• Credit
We lower our allocation to outright longs in US HY, US HG and EMBIG,
and take more risk on less directional trades on relative price convergence
and relative carry-to-risk: Long iTraxx XO vs. CDX.HY, an overweight
in EU HY vs. EM $ Sovereigns, and long CDX.HY vs. LCDX.

• Equities
Both the macro and the position support have faded. We keep a positive
stance overweighting Cyclical sectors, but we hedge via a long in equity
volatility via J.P. Morgan’s Macro Hedge Index and an OW in the Energy
sector. The search for yield should support higher-yielding stocks.

• Currencies
The first signs of currencies delinking from the global risk trade provide
opportunities for country-specific exposures. We are therefore long NOK
vs. USD, and EUR vs. GBP and NZD.

• Commodities
Seasonally weaker demand over the coming months should see oil prices
give back some of their recent gains. We stay long gold on further buying
by central banks and retail in EM.

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