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JPMorgan’s Kelly: ‘You Gotta Get Invested’

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Today’s investment markets do not offer many “cheap” options, says JPMorgan Chief Global Strategist David Kelly. “But given how low cash yields are, you gotta get invested,” he told a crowd of about 2,000 financial professionals early Thursday at the 2015 Morningstar Investment Conference in Chicago.

“Focus on alpha. As beta-play eases off, you may get the extra percent,” he explained in his keynote speech. In general, investing requires “a mixture of courage and brains, but that mix changes over time.”

Whereas during a bear market, courage is the main ingredient, bull markets demand brains to “look at what is really overpriced and [what is] going to be hurt by [rising] interest rates,” he said.

The strategist outlined the economic and financial trends behind his view that both the U.S. and global economy are “doing OK.” (The figures are found in JPMorgan’s Q2’15 “Guide to the Markets,” which is based on March 31 data, as well as in Kelly’s updated conference slides of May 31.)

The next five years “will not be as good as the past five years,” he cautioned. Still, “This is the time to invest, and really more than that, [it’s] a time to think about investing.”

Market Madness

He agrees with Wednesday’s keynote speaker Jeremy Grantham: “The Fed and other central bankers have completely distorted the market.”

While the Federal Reserve would like to move lightly, “I do not think the Fed can be as slow as it thinks it can be,” he explained.

He sees two rate hikes this year and four next year, based on forecasts from the Federal Reserve and others. “Half-fast monetary tightening is what I would call it. But it’s what is going to happen,” Kelly said.  

(The strategist explained that since derivate interest rates are “anchored to the cash market,” which is “being pulled down by low rates in cash market. That’s why I don’t trust what the market says [about interest-rate hikes]. It’s not a good forecast.”

While the Fed expects 2.2% real economic growth overall in the coming quarters, Kelly and his team expect 1.5%.  

“They missed it,” he said of the Fed, “and say it’s a Goldilocks economy. It’s not. It’s Goldilocks’ grandma’s economy. Not too hot, not too cold and not too fast.”

In other words, the Fed “will continue to be surprised that growth is too slow and will have to move a bit faster than” planned with its hikes in interest rates, he explains.

“The global economy is not weak. The U.S. economy is not weak,” Kelly said, pointing to global purchasing managers’ index (PMI) data.

“There’s lots of green, good [figures] in the developed economies. Things have switched, and the BRICs are blushing down here in orange and red. India and Mexico are doing OK, but the developed economies are doing much better.”

Europe and Japan, for instance, are on his radar as areas that should continue to improve. “Global PMI is not doing anything [but] trudging along and is doing fine as of May 31,” Kelly said.

Where to Go?

JPMorgan’s team is underweight fixed income. “But we are taking advantage [of the Fed’s planned hikes] in different slots in Japan, the U.K. and EU. There is opportunity in other places with EU bonds, some emerging-markets bonds, etc.

“It’s slim pickings, I admit,” Kelly said. Investors should move away from the U.S. Treasury market in their strategy, he stressed.

As for equities, “Look at sectors” and how they perform in rising-rate conditions, the strategist advised. “Technology and financials are not particularly vulnerable to higher rates,” compared with sectors like utilities and consumer staples, for instance.

“Invest in sectors and companies that can stomach higher rates,” said Kelly. “Go internationally, where there’s a lot of opportunity.”

Earnings in Europe and the emerging markets are not at the all-time highs like the U.S., he adds. “There is opportunity as Europe brings down unemployment, and we see European earnings go up. It’s still cheaper than the U.S. And the emerging markets are really cheaper.”

In short, “People need to get invested,” said Kelly.

Check out Grantham: Fed, Buybacks Stoking an Inevitable Crash on ThinkAdvisor.


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