The equity market bull run is likely to continue throughout 2017, according to JP Morgan’s John Bilton (pictured), so long as the reflation trade is progressive and gradual. 
As such, the global head of multi-asset strategy’s confidence in maintaining a pro-risk view over the next 12 months has increased, although he warns there are certain region-specific headwinds to contend with in some markets.
“The reflation trade is in its infancy, but the muscle memory of ultra-accommodative policy will continue to profoundly influence asset markets in 2017,” he said.
“The world economy is currently enjoying its best period of coordinated growth since the aftermath of the financial crisis. Risk asset markets have moved to reflect this, and we certainly would not rule out some consolidation in the near term.”
Performance of indices since 2008
Source: FE Analytics
While Bilton is becoming increasingly bullish on his views for markets in 2017, he warns that this could change if reflation is handled via a sudden “volte face”.
Inflation has been a hot topic for investment professionals over recent months. While some believe it will bolster growth and strengthen the prospects for risk assets, others are less ‘gung-ho’ on the results of a reflationary trade.
In an FE Trustnet article published last week, Artemis’s William Littlewood warned that the global economy would be in danger of “slipping back to the 1970s” – a period of stagflation and recession - if Trump pushes through his proposed protectionist policies.
“Our biggest concern with Donald Trump is if he was truly protectionist,” he said. “I think if he puts in true protectionist measures that would be negative for emerging markets and I think it would be negative for the US. It could bring about stagflation globally, which would not be a good situation at all.”
While emerging markets were the ‘darling’ sector for the most part of 2016, the MSCI Emerging Market index plunged following the election of Donald Trump as US president, due to concerns that trade tariffs will weigh heavily on importers and exporters.
Not only this, the president’s proposed policies for fiscal expansion have led markets to believe the dollar will strengthen, which would weigh heavily on many countries in the region saddled with dollar-denominated debt.
Performance of indices in 2016
Source: FE Analytics
However, Bilton points out that the economic data from China – which accounts for more than 25 per cent of the index – is improving and has therefore upgraded his optimism on emerging market equities.
“Economic momentum should broaden out further over the year, justifying continued faith in equities – hence we’ve increased our [equity] overweight conviction,” the head of multi-asset strategy said.
“Notwithstanding a possible period of consolidation, we think the aging bull market should continue to perform over 2017.
“Our preference is for US and emerging market equities and particularly for Japanese stocks, which have attractive earnings momentum. We’ve also upgraded our optimism on Asia Pacific ex-Japan equities on the basis of better data from China.”
In contrast, Bilton’s sole underweight is to UK equities, due to the uncertainty surrounding ongoing Brexit negotiations.
He has also retained a neutral stance on European equities which, while cheap, are exposed to risk surrounding the French election.
In another article published last week, FE Trustnet asked five multi-managers which headwinds they are positioning themselves for as we head through 2017.
The prospect of the anti-EU National Front leader Marine Le Pen gaining power in France was cited as a significant risk more than once, with SYZ Asset Management’s Hartwig Kos suggesting that, while it isn’t a ‘base case’ scenario, it should still be considered as a potential headwind.
“We fear that the market underestimates the potential of [French presidential candidate] Le Pen actually gaining power so we have been positioning ourselves reasonably defensively, with low allocation to duration and relatively little allocation to equities,” he said.
To minimise the impact of any ‘known unknowns’ on the portfolio, Bilton is maintaining diversification broadly across equity regions. His choice of equities as a preferred asset class is a reflection of the “more upbeat global environment”.
It is also a reflection on his stance on bonds. While he doesn’t believe bond yields will rise sharply, the head of multi-asset is hardening his underweight stance on duration given the expectation that the Federal Reserve will continue to hike rates.
“In these circumstances we expect credit can still deliver superior returns to government bonds, and hence are maintaining our preference for credit, although high valuations across credit markets are prompting a greater tone of caution,” he continued.
“In extending our preference for stocks over bonds, we are reflecting two factors – first, that stocks should be well supported in an environment of coordinated global growth, and second that global yields are past their lows and set to slowly rise as the reflationary environment becomes more established.
Performance of indices over 1yr
Source: FE Analytics
“Aggregate equity valuations currently stand a little above their through-cycle average, but earnings are also beginning to rebound after lying fallow for much of the last couple of years.
“After taking account of valuations – both standalone and relative to other assets – we’re preferring equities with an increasing tilt to “later cycle” themes such as financials, cyclicals and Japan.”