JPMorgan Asset Management expects a rough year ahead

Bloomberg

JPMorgan Asset Management is preparing for a rough year ahead in financial markets, and is taking to the higher-quality ground of short-dated Treasuries. Escalating trade tensions will likely be “the single most important issue moving global markets” in 2019, as they were in 2018, analysts wrote in a report on the outlook for the coming year.
A deeper trade conflict between America and China is not only likely, according to global strategists led by David Kelly — it’s among the four biggest risks to US growth next year. The others are fading fiscal stimulus, higher mortgage rates and a shortage of workers, as declining immigration begins to curb activity in the construction, retail, food services and hospitality industries.
In JPMorgan Asset Management’s view, these setbacks should temper inflation and could allow the Federal Reserve to pause after two rate hikes in 2019. That’s a flatter trajectory than most Federal Open Market Committee members saw in their latest published projections, from September.
That said, global rates probably still have room to rise as central banks in major developed markets dial back stimulus. JPMorgan Asset Manage- ment expects the European Central Bank to deliver its first post-crisis rate hike by mid-2019, and also predicts “some form of modest tightening” in the UK and Japan.
In this scenario of weakening growth and tighter monetary policy at the end of a historically long expansion, the investment manager says volatility could increase. Their strategists expressed caution on riskier assets such as emerging-market and high-yield debt, which may be more correlated to weakness in stocks. They favor short-term government securities. Two-year Treasury yields are currently yielding around 2.83 percent, close to their highest level in a decade. “Short-term interest rates are now positive after adjusting for inflation, creating some viable competition for stocks,” strategists wrote.
And while they acknowledge that bondholders may suffer somewhat from global central bank actions in 2019, the asset manager says investors should shift their focus at this stage of the economic cycle from a reach for yield to protecting against losses.­