Discipline Matters-JP Morgan Chase
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Weather, geopolitics, monetary policy and momentum each played their part last year to challenge investors across asset classes. “I don’t know anyone who felt great about markets last year, as market transitions are always challenging,” notes Richard Madigan, Chief Investment Officer and Head of Investment Strategy.
And 2015 is going to be more challenging than 2014, continues Mr. Madigan, because of where we are in the investment cycle, but that doesn’t mean investors should be out of markets. The trick to a transition year is to stay focused on the fundamentals.”
Energy as the wild card A major wild card to watch, however, is energy, notes
Mr. Madigan. “The knock-on effects to sentiment and credit markets in particular can increase the risk-off momentum we saw across global markets in December.”
We are likely to see debt downgrades and restructuring across the energy sector that will force consolidation as marginal high-cost producers are squeezed out, and remaining producers focus on productivity efficiency.
Ultimately, Mr. Madigan and his team believe the net macro effect will be positive—though how we get there and how long it takes will make a difference. “Markets dislike uncertainty, and oil has moved too far, too fast for investors to feel comfortable they aren’t missing something in the bigger picture,” explains Mr. Madigan.
Short term, there is embedded tail risk for markets as we enter 2015. No one knows what fair value is for spot energy prices right now, regardless of what might be said. Notes Mr. Madigan, “It is why we are still underweight commodities.”
Interest rates, inflation trending lower
Low energy prices, a strong dollar and slow global growth are going to keep interest rates low, and inflation expectations trending lower across developed markets.
Just as “too much, too fast” can be a concern, “too low, too fast” is equally problematic for developed market central banks this year, especially regarding inflation. Disinflation is going to be a recurring theme that will weigh on markets ahead. That may put pressure on equity valuations, as a disinflationary macro environment tends to coincide with lower-multiple markets.
Markets aren’t cheap
“We believe that stocks will drive portfolio returns this year. That has us positioned overweight in equity allocations across portfolios as we start the year. The challenge for investors will be to temper return expectations,” says Mr. Madigan.
Valuations aren’t cheap, which leaves it to earnings to drive equity market returns. The quality and confidence in earnings will play a more important role for multiples as well, because we aren’t starting off with markets that are cheap.
“We expect equity market volatility to be higher,” notes
Mr. Madigan, “which emphasizes the discipline of staying invested and focused on the fundamental outlook, which we view as constructive.”
Mr. Madigan, “which emphasizes the discipline of staying invested and focused on the fundamental outlook, which we view as constructive.”
To learn more about our views and how we can position your portfolio for 2015, we invite you to contact us and a J.P. Morgan representative will be in touch with you.