Fiscal policy debate prompts JP Morgan to lower underweight on global equities

JP Morgan reduced its 'underweight' stance on global equities on expectations that global economic growth would return to trend in the second half of 2016 and given rising - albeit not yet significant - odds that fiscal policy might take over from monetary policy.

Linked to the above, the broker´s global asset allocation team said it now saw reduced risk of an immediate recession, leading it to reduce - at the margin - the defensiveness of its portfolio.

Nonetheless, "the lack of a clear growth upside bias prevents us from fully joining the growth trade," it cautioned.

"Low and stable growth, at this point of the cycle, still does not give us much earnings growth, and thus continues to favor income strategies from dividends, coupons and carry," Jan Loeys AC, John Normand, Nikolaos Panigirtzoglou, Mika Inkinen, Gregory C. Shearer, Nandini Srivastava and Lixin Bao said in a research report sent to clients before the start of trading in London on 4 August.

The investment bank said it was retaining "important" elements of its Income Strategy with high-dividend stocks, REITs, preferreds, credit and emerging markets, although the "new debate" on fiscal policy created risk on bond duration (the sensitivity of debt instruments´ yield to changes in central bank policy rates).

"We thus now hold credit again on a duration-hedged basis, and seek out more carry and income in EM than before," it added.

Nonetheless, they brought their stance on equities closer 'neutral' but remained 'underweight' versus their benchmark by 3%, even if credit remained "by far" their preferred asset class on a duration-hedged basis

Commodities were brought back to 'neutral', as their volatility remained overwhelming.

In the same report, JP Morgan forecast that the yield on the benchmark 10-year US Treasury note would be at 1.80% in the second quarter of 2017 while the Fed funds rate would be at 0.75% in December 2016 and 1.0% in March 2017.

In the UK, the strategists expected Bank Rate to be at 0.00% as of September 2016 and the yield on the benchmark 10-year Gilt to rise to 1.15% by June 2017.