Crisis will take time to resolve – JP Morgan
The US credit rating downgrade, the continuing government debt crisis and sharp stock market declines have left investors shell-shocked. Senior officials from JP Morgan asset management outline their views on the crisis.
Neill Nuttall, chief investment officer and head of the global multi-asset group at JP Morgan asset management, said the crisis is not new having come to a head in 2008 and it would take time to overcome.
There are structural headwinds in the markets that are driven by dominant economic and market factors. This was likely to continue for three to five years. While the impact would be most felt among the developed countries, it would also indirectly affect the developing world.
Amid all the gloom there were some positive developments such as strong corporate earnings. But overall conditions were difficult for asset managers and investors. “There are significant challenges for portfolio construction. Diversification is a main objective of portfolio managers, but this is proving particularly hard to achieve at the moment. We strongly recommend multiple strategy approaches with active asset allocation,” he said.
Looking at the broader economy, Nuttall dismissed the suggestion that growth in the more dynamic emerging economies will solve the crisis in the developed economies. “This is not going to happen in the time frame needed. China and the rest of the developing world will not be bailing us out,” he said.
For a sustained recovery the private, mainly corporate sector, will have to draw down on its savings, though there are few signs that this is happening.
Nick Gartside, international chief investment officer for global fixed income at JP Mogan asset management, said the debt crisis was caused by too much of a good thing and excessive borrowing from some debtors.
What mattered now were the economic fundamentals. He warned In a debt deleveraging cycle the dynamics for growth and inflation are on the downside.”
The US downgrade was not surprising considering the country’s debt to GDP ratio rising to over 110% over the next five years and an enduring budget deficit.
There were two potential candidates in the medium term to lose their triple A rating, he said. France with its debt to GDP ratio expected to reach close to 90% of GDP over the next few years, and the UK, for which debt is expected to peak at about 80%. The UK faces problems because of the size of its deficit and the need to get that deficit under control.
Uncertainty in Europe has been exacerbated by lack of political decision. “What the markets are waiting for in Europe is moves towards closer economic union and towards a common bond. In Europe we have not got a solution yet,” he said.
Tom Elliott, global strategist at JP Morgan asset management, said the treasury market remains secure and appears to be unperturbed by the US downgrade. So we can still use treasuries as our risk free rates of return.
Provided the global economy avoids a double dip recession, there are investment opportunities, he said. “For growth go to emerging markets, for income go to developed market blue chips stocks.”
Markets look pretty cheap, he said. But even after a recession there are good returns to be made. “Look at the returns you get after [a recession]. That’s an argument for holding on not selling. The best options is holding and sitting this out rather than selling.”
Choosing the right assets will be more difficult, Nuttall said. There is not any particular asset class or group of asset classes that are going to do well consistently over the next three to five years. So he recommends investors to have active asset management and allocation looking at multiple-strategies.
Turning to interest rates, Nuttall said he expected interest rates in UK to stay low for a long period of time. “I don’t think interest rates will move this year or next year,” though inflation could prove to be a wild card.
Looking at prospects for the euro, it was unlikely to disappear tomorrow, he said. The euro is an economically flawed political construct and it was bound to be severely tested during a significant economic downturn. But provided the political will remains, the euro will survive, he said.
This was likely to lead to closer union, Gartside said. “At the moment political leaders want the euro, that means closer political union and from a bond market perspective it means you see moves towards a common (eurozone) bond. I wouldn’t rule that out at some point later this year.