While there are pockets of risk in markets, investors shouldn’t let recency bias colour their view on the potential severity of any correction to the late-market cycle, said Kerry Craig, global market strategist for J.P. Morgan Asset Management Australia.
Global markets are not in the same place they were before the dot-com crash of 2001 and the GFC in 2008, Craig said at a media briefing in Sydney this morning, and “not every market downturn is so dramatic”.
“People assume that the next downturn will be like the last and the GFC is going to happen all over again,” Craig said, “and that’s a fair concern for our clients, who have very painful conversations with their own clients around what happened during that period.”
Craig said that while global growth has a “fuzzy outlook” and a market correction might eventuate, a more stable US market and a slow-and-steady approach from the US Federal Reserve will soften the blow.
“The next US economic recession is expected to be relatively mild, given better inventory management and greater stability in the housing and services sectors,” Craig stated. “These conditions should help modulate the severity of an equity market correction.”
Part of J.P. Morgan’s sanguine outlook is due to the Fed’s “relatively benign” current policy; while it has steadily raised rates since 2015, J.P. Morgan expects the approach to be “low and slow” through the next few years, leading to rates hovering around 3 per cent in 2021.
Craig used a barbecue analogy to explain the Fed’s approach.
“They’re not grilling the market, they’re barbecuing it,” he said. “They’re taking care of it, marinating, loving and looking after it. They’re nurturing this market, bringing it along to this level where you’re going to see those rates slowly become more punitive in terms of borrowing and restricting growth.”
Craig explained that despite key risks, including a US/China trade war that could get worse before it gets better, the next downturn is “unlikely to be as bad as the last”.
Emerging markets hurt by the strong US dollar should be able to bounce back in due time, he noted, and investors should strive to identify “positive structural and cyclical stories that have been overlooked amid the noise”.
“Emerging markets may have left a bad taste in investors’ mouth this year, but they are not all of the same flavour,” Craig said.
Strategy tool-kits
Craig urged investors to retain a thoughtful market plan and balanced portfolios. Bonds, he said, should be considered as portfolio stabilisers that provide “buffers to shock”.
“Strategies in the toolkit include taking a flexible approach to fixed income to take full advantage of the asset class’s ability to generate income and reduce portfolio volatility,” he said; however, while investors may consider dialling down their equity risk, Craig argued large-scale sell-offs would do more harm than good.
“Human behaviour is biased against losing,” he said. “Hence, the natural reaction toward a market downturn is flight instead of fight, but getting out of the market too soon can be just as painful as getting out too late.”
