JPMorgan’s John Normand stays bullish on equities over bonds

JPMorgan’s John Normand says the US is likely to avoid a recession in the foreseeable future.

JPMorgan’s John Normand believes there is no chance of a US interest rate hike any time soon. Picture: Hollie Adams

John Normand’s consistently bullish view of the US sharemarket this year has been spot on.

Driven up by stabilising economic data and de-escalation of the US-China trade war, the S&P 500 hit a record high near 3100 points last week, while safe haven US government bonds retreated.

With a 23 per cent rise so far, the US benchmark is having its best year since 2013.

London-based Normand, who heads cross-asset fundamental strategy for JPMorgan globally, says the US is likely to avoid a recession in the foreseeable future, with broader positive implications for risk assets ­globally.

On Friday, he recommended increasing “risk on” cyclical exposures owing to signs of economic recovery and declining geopolitical risks.

“We maintain a significant and incrementally larger tilt in our model portfolio towards risky assets, based on signs of a cyclical recovery, easing geopolitical tensions, synchronised monetary easing, and defensive investor positioning across asset classes,” Normand says. The asset allocation team has been positioned for a convergence between value and momentum assets, believing the divergence of the two styles in recent years had peaked and that further “convergence” was likely in coming months.

His model remains overweight relatively cheaper assets including value, emerging markets currencies and bonds, European equities and some commodities like oil and agriculture, and underweight US and European bonds.

“We’ve been overweight equities, cyclical stocks and value stocks for a while, but over the past month we’ve been incrementally adding to reflation trades by going underweight safe assets like G10 bonds, the yen and gold, plus buying EM currencies and inflation linked bonds,” he says.

Within equities his model is overweight Europe and Japan versus underweight the UK regionally. In styles, he remains overweight value versus low volatility and momentum — given still extreme valuation divergence and positioning — and overweight cyclicals versus defensives.

Normand focuses on “what to buy in a mediocre growth world (meaning no better than trend growth) but no recession”.

But he sees Fed policy as supportive for reflation — something the world hasn’t seen for quite some time — leading to stronger growth and higher markets.

“What the Fed is signalling is that ... it has got more confident on the growth outlook,” he says. “That’s why it’s pausing the easing cycle, but it’s going to wait a long time before raising interest rates because it’s concerned about inflation being too low.”

Sharemarket valuations aren’t exactly cheap, but a dovish Fed may be quite supportive of the current business cycle, already the longest in recorded history.

In his view it will allow growth to turn up without investors needing to worry about a premature end to the business cycle because of higher rates.

If the Fed were “trigger happy” about rate hikes it would be negative for markets, but Normand sees an “incredibly patient” Fed, partly because it’s not sure if the trade war is over, but more importantly because it’s moving to a different inflation targeting regime.

That will encapsulate the Fed’s recent thinking that monetary policy should be “symmetric” by staying accommodative for some time after its 2 per cent inflation target is eventually met.

Normand expects this “average inflation targeting” regime to target an average rate of inflation of 2 per cent over the business cycle, and because that hasn’t been achieved for the last few years, it’s expected the Fed will allow inflation to overshoot 2 per cent for some time.

Details of the Fed’s new inflation targeting regime are due to be revealed early next year.

“My assumption is that they would want to see several quarters of inflation above 2 per cent before they felt like they had achieved anything,” he says. “But I don’t think they will be super precise because no central bank has a good track record of inflation forecasting and maybe getting higher inflation is beyond their reach. The bottom line for investors is that there’s no chance of a US interest rate hike any time soon and that’s one less thing to worry about over the next year.”

While the concept of average inflation targeting has been around a while, the Fed hasn’t set policy to achieve symmetry in terms of overshoots and undershoots of inflation versus its ­target.

“Previous Fed chairs like Janet Yellen have talked about symmetry for a while,” Normand says.

“What’s different is that they seem to never really have set policy as if they’re really trying to achieve symmetry. If they were, maybe instead of starting the hiking cycle in 2016 they would have waited longer and moved slower in 2017 and 2018. So even though this word has been around for a while, they haven’t been serious about it until now.”

He feels the flow of economic data have mostly been consistent with a bottoming in the global economy, particularly with some of the key manufacturing indexes stabilising.

“Because the manufacturing sector tends to lead the global economy, this could be the start of an upturn,’’ he said. “There’s no evidence that the global economy is stepping up but the markets will move on what they expect to happen in the next few months.”

Normand’s multi-asset team has been positive all year on equities, thinking at some point the trade war will stop and at some point the monetary easing will lift growth, so he hasn’t needed to change the call that equities will outperform bonds.

In terms of regions, they are overweight the EU and Japan versus the US because their economies and markets were much more damaged by the trade war.

He’s not so enthused about the outlook for emerging markets relative to developed markets, because that would require EM growth to accelerate but China is still slowing.

What happens later next year will be more a function of whether there is progress on a phase-two trade deal, and the outcome of US presidential and congressional elections in November.

“Obviously there’s a lot of policy risk created by those elections,” Normand says.