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Investors can expect 'bear market bounce' in H1 2019, but recession risks persist: JP Morgan Asset Management
WHILE equity markets have entered bear market territory of late, investors can expect a sizeable "bear market bounce" in the first half of 2019, JP Morgan Asset Management (JPMAM) said in its Q1 2019 market outlook on Thursday.
JPMAM's Singapore-based global market strategist Jasslyn Yeo noted that several potential positive catalysts support the possibility of a significant bounce, including the recent dovish change in the US Federal Reserve's reaction function.
"The first quarter has typically been a seasonally weak quarter for US growth. Coupled with the US government shutdown, we expect the Fed to pause in March and for this pause to bring about much relief for risk assets," said Dr Yeo.
She added that investor sentiment could improve on the back of a positive Q4 2018 earnings season, further China policy stimulus and a potential US-China trade deal before the March 2 deadline.
Dr Yeo also judges the current bear market to be a more cyclical one associated with the normal downturn of business cycles, given the absence of major structural imbalances. Cyclical bears tend to see shallower corrections and quicker recoveries than structural bears.
However, Dr Yeo noted that the outlook points to further recession risks and longer recoveries ahead, given the more limited ability of central banks to stimulate the economy. Going by slowing global real gross domestic product (GDP) figures, global growth is moderating from above-trend to trend rates, and markets are "firmly in late cycle 2.0".
Global central banks are also gradually withdrawing liquidity support that bolstered market returns and asset prices in the last several years.
"Global growth is slowing and global liquidity is tightening, but the US Federal Reserve is unlikely to stop hiking rates with no immediate threat of a recession. The European Central Bank could find it hard to raise rates, while the Bank of Japan is likely to remain status quo. Conversely, the Chinese government could further ease policy to stabilise growth, but we don't expect to see any big-bang stimulus."
Dr Yeo also noted that Fed tightening cycles have been followed by recessions about 75 per cent of the time since World War II.
Dr Yeo recommended that longer-term investors use the bear market bounce to de-risk their portfolios, considering more bond exposure to diversify and mitigate volatility. Demand for safe-haven US Treasuries will likely increase as the Fed approaches the peak of its rate-hike cycle and recession risks also increase.
JPMAM remains cautious on equities beyond the prospect for a bounce, preferring equities with more defensive, income-generating characteristics.
"Valuations may be looking more reasonable following a difficult 2018, but it's hard to see sustainable re-rating with tightening global liquidity and negative earnings revisions," Dr Yeo said. "Earnings per share growth is likely to fall further as the cycle slows down."
Dr Yeo advised caution on emerging markets/Asia ex-Japan equities, as the US dollar is likely to appreciate with rising recession risk. US corporate bonds are also vulnerable, with large downside risks and typically poor liquidity when recession risks increase.