The move has been inspired by expectations of rising inflation as fiscal policy comes to the fore in the United States and elsewhere around the world.
Head of multi-asset strategy John Bilton explained that his team’s asset class views had changed ‘in light of the reflation trade.’
“2016 marks a profound shift in the underlying economic environment—from monetary to fiscal primacy,” he said. “The early stages of populism, as evidenced by Brexit and the Donald Trump victory, would seem to promise that even a meagre fiscal boost may unleash animal spirits and bring forward consumption. To be clear, pro-cyclical fiscal stimulus is uncharted territory, but thus far the reaction of the S&P 500 and the Russell 2000—up 3% and 11%, respectively, since the US election—suggests markets are prepared to give it the benefit of the doubt Only time will tell whether fiscal policy can unleash the American economy’s inner tiger or will merely grab an inflationary Tigger by the tail.”
Bilton acknowledged however, the ‘the reality may well not live up to the hyperbole’ when it comes to the stimulus efforts.
“While we expect a modest fiscal boost, it is unlikely to exceed 0.5% of GDP and will be back-loaded to the second half of 2017 at best, translating to slightly above-trend growth, on average, in 2017,” he said. “The better news is that global growth in general was already settling into a pattern of near-trend growth for 2017. On balance, this leaves us with a modest growth backdrop and limited recession risk but with a clearly more reflationary picture than we’ve had for some years.”
Other notable views expressed by Bilton’s team include a belief that the lows in bond yields we have seen are now behind us, and dollar appreciation will continue but at a slower pace than has been the case this year.
Outside of the duration call, this set of views has resulted in JPMAM maintaining a small overweight to equities, but with greater conviction than it had in September, and a neutral aggregate view on emerging markets assets, with a small overweight to emerging markets equities and an underweight to emerging market debt.
The team maintains a preference for credit over government bonds but in absolute terms has trimmed its credit overweight to ‘a more modest level.’ An overweight to real estate has been held steady, with preference for direct exposure rather than REITs.
