Here's What JP Morgan Is Telling Millionaire Private Clients As Emerging Markets Crumble

2013 was an excellent year for U.S. stocks, but 2014 has already gotten off to a volatile start.

Some warn of a correction while others say the stock market could still rise this year.

More recently there are concerns about contagion from emerging markets.

Richard Madigan, CIO at J.P. Morgan Private Bank, thinks there are some big differences between what we’re seeing now and what we saw in the mid-to-late 1990s.

“We came into this year expecting markets to be more volatile based on the fact that they, like the global recovery, are transitioning to a more normal environment,” he told Business Insider.

“We’re already seeing indications of this as volatility has already picked up across asset classes. Consensus opinion is currently pointing to emerging markets as the cause.”

Madigan says JPMorgan has “significantly reduced investments in foreign currencies, commodities, EM debt and EM equity markets” over the last year. And in some instances they “cut 10% to 15% of portfolio exposure.” While he is watching the emerging markets space for attractive entry points, he says, “we don’t believe now is the time to be adding back to investment positions.”

With that as a frame of reference, we looked at the latest J.P. Morgan Private Bank Market Outlook report (published January 15) aimed at its wealthiest clients. In it Madigan writes that his outlook for the year is “built around the continuation of a slow-but-steady global recovery.” He also thinks valuations are not overextended.

J.P. Morgan Private Bank’s typical client has $US5 million in investible assets, though their sweet spot, they say, is in the $US25 million range.


Global stocks returned about 25% in 2013, which means global equity markets increased by about $US7 trillion in 2013. In 2014, JPMorgan expects the S&P 500 to return 8-14% with about 6-8% EPS growth. European stocks are expected to return 10-12% and Asian emerging markets ex-China are expected to return 7-10%.

“Importantly, the global macro backdrop is improving, particularly in developed markets where the policy picture remains supportive. Strong corporate balance sheets and a stronger economic environment have laid the groundwork for higher corporate cash deployment.”

We’re not in a stock market bubble yet.


U.S. high-grade bonds could see 1-1.5% total return in 2014. Muni bonds could see -2.75 to -2.25% return, and U.S high yield is expected to return 5-6%.

“We think we are about halfway through the transition to higher U.S. interest rates, and advocate a 2.0- to 2.5-year duration target across fixed income portfolios. From an allocation perspective, we favour modest exposure to credit as well as benchmark-agnostic total return strategies that can tactically navigate a volatile market.”

Emerging markets

It’s important to not lump all emerging markets together. “We continue to favour countries that are commodity importers with stable current accounts and positive earnings growth, leaving us focused on North Asia.”


There are five risks to markets this year. In terms of central bank actions, the Bank of Japan is the one to watch because of the sheer scale of its monetary and fiscal experiments. “Any missteps or a reversal of market confidence is likely to cause market disruption. We are watching the yen for any sign of doubt — we would view a markedly stronger yen as a negative vote of confidence against Abenomics.”

Too much inflation, elections in key emerging markets and midterm elections in the United States, limited corporate investment, and stalled European growth are other risks to watch for.

Portfolio construction

  • We are looking more at developed markets “to make sure economic and earnings growth is lasting.”
  • Among emerging markets, focused on North Asia for investment opportunity.
  • Underweight fixed income and reduced the duration of the bonds they own.
  • Overweight alternative investments. “Given our outlook, we want investments that don’t all need to be directionally tied to equity market risk. That’s the case with hedge funds, where we are funding overweight positions from fixed income allocations. We continue to favour long/short equity strategies as well as relative value/credit and event-driven managers.”
  • “With regard to sectors, we prefer cyclicals over defensives. On a global basis, technology, financials, industrials and health care (in pockets) look attractive. Particularly in Europe, we are constructive on autos and auto suppliers.”

Bottom line: Stocks will outperform bonds, the time is right to look at international stock markets again, and when it comes to emerging markets investors need to differentiate among them. 2014 will be a year of higher volatility but will be good for risk assets.

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