The carnage continues as each month brings worse and worse economic data, and the consensus continues to slash growth forecasts for this year and next. As a result, many strategists continue to recommend “recession trades” for their clients – underweighting equities and corporate credit, along with long positions in relatively safe bonds.
Jan Loeys, head of global market strategy at JPMorgan, is in that camp. He now acknowledges that it may be late summer before the U.S. economy stops contracting, while at the same time pushing his recovery forecast for Europe back to the end of the year.
Mr. Loeys suggests an overweight in the risky assets and currencies of regions that are expected to reach the recession finish line first, coupled with an underweight of their bonds. He thinks China will reach this milestone first, followed by the U.S. and then emerging markets in Asia. Japan, Europe and other emerging market countries are expected to be last to come out of the recession.
Mr. Loeys told clients:
With the needed caveat that the crystal ball is murkier than ever, our guess would be that the developed world will see zero if not negative inflation through much of this year and next, but will likely see a rise thereafter that could rival the inflation of the early 1970’s.
However, inflation is not expected to rise because of booming demand, but rather due to low capital investment, higher regulation and protectionism that will hold back production capacity and thus potential growth.
So while timing the inflation play will be tricky, he said the hedges against an inflation cycle include commodities, gold and inflation-linked bonds.