With resilient economic data from most sectors barring the US labour market, the asset manager has backed risk assets even as valuations remain high.
Global market strategist at JP Morgan, Kerry Craig, told InvestorDaily that the prevailing strong consumption trend indicates a relatively “soft landing” in the US and across the world.
“Even though consumer confidence is still relatively low and there are still some inflation concerns, it just seems that US people will spend regardless,” Craig said.
However, he cautioned that a significant decline in employment growth or a substantial increase in the unemployment rate does remain a risk – particularly since the current US government shutdown makes it difficult to accurately assess these figures.
“That really unwinds that strong consumption narrative and would be more of a headwind to the growth story in the US,” he said.
Craig added that with the full effects of tariffs yet to be realised, there is a likelihood of increased inflation in the US economy, a situation the asset manager has termed “stagflation light”.
“But we don’t think it’s going to be permanent,” he said. “In terms of that, the growth outlook is remarkable, given all the policy dynamics that have happened this year when it comes to the Fed.”
In addition, Craig emphasised the US Federal Reserve’s recent rate cut pivot as being driven by a focus on improving the employment outlook rather than controlling inflation, which he views as a “temporary” concern.
While he noted there has been some recent pushback on just how many rate cuts the market has priced in, he said JP Morgan’s conviction is that the Fed is “definitely on that downward trajectory”.
The firm has projected two more rate cuts this year, with an additional two cuts likely to occur within the first quarter of next year.
Craig highlighted the big implications for the US dollar, which he expects will continue its downward decline as the Fed catches up with global rate outlooks.
Regarding investors, JP Morgan maintains a degree of optimism for the US market – particularly in light of advancements in artificial intelligence and technology.
However, Craig advised investors to be mindful of dollar exposure: “US asset exposure, yes, US dollar exposure, less so.”
He further outlined that the current strategy involves hedging, especially given that falling interest rates should lower hedging costs for foreign investors and currency movements will have a bigger impact on returns going forward.
Other opportunities
Meanwhile, Craig has encouraged diversifying away from the US.
In particular, he highlighted the roaring success of emerging markets so far this year, due in large part to a weaker greenback.
He pointed to MSCI’s Emerging Markets index, which has recorded nearly 30 per cent in net returns for the last year to 30 September.
“If AI is doing well in the US, where do the bulk of the inputs come from? Korea, Taiwan, North Asia, basically. So they’re really in tune with that,” he said.
Craig further noted China’s recent re-rating as a significant development, adding that equities remain affordable.
However, he advised against treating emerging markets as a single entity, highlighting the distinct circumstances in North Asia compared to South American nations or South Africa.
Finally, Craig emphasised asset classes that offer diversification and significant growth opportunities, given the risk of stagflation and the fact that bonds do not offer protection.
For diversification, he said JP Morgan likes real assets such as infrastructure and transport: “They’re things you need in the economy, regardless of if it’s a recession or not.”
With high valuations in the equity market, he identified private equity and venture capital as major growth areas as investors search for the “next AI story”.
“You’ve had increasing activity, increase in IPOs, and that reopening of the private markets in terms of that activity, and also lifting the whole sort of private equity ecosystem,” Craig said.
He ultimately concluded that for investors, the key question revolves around portfolio construction, not whether markets are public or private.
