Get ready for a bumpy economic path in Q1

COVID cases and vaccine distribution will remain the key focus for investors who should be prepared for a bumpy start of the new economic cycle and focus on improved earnings outlook as well as still supportive fiscal and monetary policies, according to J.P. Morgan Asset Management (JPMAM). 

At the same time, while the outlook for risk assets remained positive, investors should watch cyclical sectors and regions and might want to shift their portfolios accordingly. 

“There are still risks. The pace of distribution of vaccines being a key one, but there are others. The Georgia run-off is still a potential flash point, but unlikely to largely change the outlook for fiscal stimulus in the US,” JPMAM global market strategist, Kerry Craig, said. 

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“Investors should look through the bumpier start to the new economic cycle and focus on the improved earnings outlook and still supportive fiscal and monetary policy stance. Even if monetary and fiscal policy support may not increase as much in 2021 as it did in 2020, the fact that they are still at a very loose setting helps the outlook for risk assets like equities and credit.” 

The firm said it would remain overweight risk going into 2021, balanced across both equities and credit, while expecting the economic recovery to broaden out as the year goes on, with most major economies to be roughly back to where they were pre-Covid in GDP terms, except for China which would be expected to stay well above those levels. 

“This will feed into a substantial recovery in corporate earnings, and earnings expectations are probably too low for 2021 – which is unusual for the start of a year. But risk asset returns will likely be more moderate, constrained by high valuations. In other words, much of the recovery is already priced,” JPMAM global multi-asset strategist, Patrik Schowitz, explained. 

At the same time, the manager would be underweight the US dollar as the yield advantage was already gone, and with diminishing uncertainty the strong global growth recovery should favour the rest of the world. 

“Inflation is a key risk investors are worrying about, on the back of aggressive monetary and fiscal policy.  

“We think it’s more of a long-term risk, as there’s still too much slack in economies for inflation to pick up significantly in 2021 beyond a few short-term spikes due to supply chain issues here or there. But there will be strong base effects in H1, so market could get concerned,” the firm said. 

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