Sylvia Sheng, global multi-asset strategist at JP Morgan Asset Management, shares her 2024 global asset allocation views for the second quarter.

Sylvia Sheng (pictured) at JP Morgan Asset Management anticipates US real GDP growth of around 2 per cent for 2024 — slightly above trend and in line with the current pace.

“Inflation is set to cool gradually, with the headline consumer price index (CPI) reaching the low twos by year-end. This should in turn prompt the US Federal Reserve to deliver two or three rate cuts this year, likely starting at the June meeting,” Sheng said in a note.

This environment supports a pro-risk stance. In the firm’s multi-asset portfolios, Sheng overweights credit and equity. Meanwhile, she is neutral on duration as bonds, saying they will likely trade in a range, but the promise of rate cuts probably caps the risk of bond yields moving sharply higher.

With interest rates set to decline this year, Sheng underweights cash, managing the negative carry of this position through targeted trades in credit and FX. “Differences in policy timing and growth rates across the globe also create meaningful relative value opportunities, as well as greater potential to capture security selection alpha via our end managers,” she said.

Equities
While the business cycle probably has some way to run, the economy is not in early cycle. As a result, she expects more modest earnings' growth and valuation expansion, but remains constructive on stocks over the intermediate term. In the shorter run, Sheng sees signs that recent price momentum may fade. She therefore slightly trimmed equity overweights at the margin, with a view to using any consolidation to take risk up once again.

Sheng finds attractive relative value and stock selection opportunities across equity markets and favors tilts toward high quality, cash compounding names. The recent broadening of market leadership away from the mega-cap technology sector is encouraging for both the long-run market trend and the potential for active alpha. Regionally, she prefers the US and Japan. She is not alone in her views. BNY Mellon Investment Management also favors US and Japanese equities. See more commentary here. 

Credit
“Credit spreads have tightened in line with the rally in equity markets, but some of the key technical factors remain supportive of the credit markets,” Sheng said. “If equity markets consolidate, credit spreads may widen a little; but new issues are attracting strong demand and requiring limited concessions to investors. This suggests that credit will probably hold up well in our core economic scenario.”

“Returns from credit at this stage are likely to come mostly from coupon carry rather than spread tightening. The source of return may seem pedestrian, but in a portfolio context, credit can play an important role,” Sheng continued. Allocators can use credit to manage negative carry positions such as JPMAM's underweight to cash. Within the credit complex, she favors shorter dated US high yield, non-agency mortgages, and securitized credit.

Duration
Ahead of the first Fed cut, Sheng expects the 10-year US Treasury trading between 3.75 per cent and 4.5 per cent. That said, she remains neutral on duration, as the carry penalty of 17 bps per annum is offset by just a 25 bps rally in yields. 

Sheng does not anticipate a sharp dip in US yields, absent of a significant weakening of growth. Instead, she sees opportunity in relative value positions in government bonds, alongside more actively trading the ranges. She prefers the US, core and peripheral eurozone, and Australia. Canada and Japan are her favored underweights.

Cash
“Policy rates of 5.5 per cent in dollars and 4 per cent in Europe continue to encourage some investors to consider simply sitting in cash. This is far from a riskless trade,” Sheng said. A cash position carries significant reinvestment risk. She believes that given good opportunities for both beta and alpha in all the main asset classes, cash will become a default underweight.

While Sheng could see short-lived spikes in volatility should stocks consolidate, she believes that cross-asset volatility will remain generally subdued this year, suggesting that cross-asset correlations could fall modestly. Although Sheng does not foresee a reversion to negative stock-bond correlation, any dip in correlation will further strengthen diversification opportunities for asset allocators.