Asset allocation: Near-term correction on rising policy uncertainty. We stay with medium-term positive view. Investors planning to add risk do not have to hurry.
Economics: Forecasts on hold, but data confirm widening growth gaps between US/EM and EU/JA.
Fixed income: Stay short duration. Await better news to reenter EMU convergence trades.
Equities: Uncertainty has risen, but not enough to change strategy. Stay long, focusing on EM, cyclicals, and small caps. Within financials, favor credit banks over investment banks.
Credit: Spread volatility likely to rise as policy risk increases uncertainty.
FX: Sell GBP/CHF.
Alternatives: Stay short crude oil. Be long cocoa, sugar, and coffee, but short grains.
Click on chart to enlarge, courtesy of J.P.Morgan.
The guys assert they almost knew what is coming:
We have argued before that the main risks to markets emanate from policy errors and residual delevering. Our argument had been that, while each needs to be monitored, they are likely less acute than generally feared while markets offer us sufficient risk premia against them. That is why we are long risky assets. The risk of policy errors comes from any premature monetary and fiscal tightening and regulatory overkill. The reaction of markets to Chinese tightening and Obama’s new bank plan fit this category.
Sufficient risk premia? I cannot see the margin of safety ... but we are pretty oversold in short term.