JPMorgan asset management thinks it’s too soon to celebrate

• JPMorgan Asset Management says a mild recession is likely to hit the world’s advanced economies next year. In that scenario, higher-quality stocks and those that deliver income will likely perform best.

• Today’s high cash deposit rates are a temporary mirage, the investment house says, and are unlikely to remain visible for long. Bonds look more attractive and could offer substantial upside returns, particularly if the recession is deeper than expected.

• Investors should also consider adding some alternative investments into their portfolio’s mix, the firm says. They can provide uncorrelated returns to stocks and bonds, which could be especially appealing if inflation picks up again and sends stocks and bonds lower in tandem, like in 2022.

By now, you might’ve thought we’d be deep in the clutches of the global recession that everyone’s been warning about. The fact that we’re not – while a big relief – maybe shouldn’t have you popping any Champagne corks just yet. In its 2024 outlook, JPMorgan Asset Management says the recession hasn’t been averted: it just hasn’t started yet. Here’s what it says you’ll want in your portfolio when it comes…

So what’s the firm’s forecast for 2024?

The asset manager’s big consideration when making its forecasts for 2024 was in trying to calculate the delayed reaction the economy might have to the latest series of interest rate hikes. After all, it hardly seems likely, at least to these folks, that after years of near-zero interest rates, economies might be entirely unflustered by interest rates of 5%, as in the case of the US and UK, and 4% in the eurozone. So after probably quite a bit of pencil work and high-tech modeling, they worked out that the damage of higher interest rates will probably become increasingly visible next year in consumer and business spending data. (So much for the notion that Goldilocks is back and finding things to be not too hot and not too cold.)

So that’s where you’ll find the wealth firm’s base case: it sees developed market economies sliding into mild recessions and sees that situation pushing inflation down toward the 2% long-range central bank targets. The economic troubles will eventually lead to interest rate cuts, but only to levels that are still well above pre-pandemic lows. Stocks won’t love this situation, and so they’ll probably drop a moderate amount, with higher quality companies and income-producing shares doing better than the rest. Bonds, meanwhile, would be more in their element, with yields benefitting from the thought that there could be further rate cuts ahead.

Which stocks are worth a look then?

The asset management company would point your attention first to higher-quality stocks – those companies that have strong balance sheets, proven management teams, and a stronger ability to defend margins. They’ll do better if there is a mild recession, after all. And, while you might be thinking that tech stocks would fit the bill here, the firm’s outlook highlights examples in more cyclical sectors like industrials and financials, and in more traditionally defensive sectors like healthcare. For a quality stocks play, you could consider buying the iShares MSCI USA Quality Factor ETF (ticker: QUAL; ticker: 0.15%). It’s got chunkier holdings across several sectors.

Top 10 holdings of the iShares MSCI USA Quality Factor ETF. Source: BlackRock.

Once you’ve considered quality stocks, JPMAM would have you consider an income strategy for your 2024 portfolio. Now, the firm does admit that potential downgrades to earnings expectations are likely – they’re exceptionally high these days – but it says today’s low payout ratios and solid balance sheets should still leave management plenty of room to return cash to shareholders. For an income play, you could consider buying the SPDR S&P Global Dividend Aristocrats UCITS ETF (GLDV; 0.45%). It has a pretty nice 4.4% annual dividend yield.

SPDR S&P Global Dividend Aristocrats Sector and Country allocation. Source: Bloomberg.

And, once you’ve done that, the firm would have you think about diversification. With so many economic uncertainties out there, JPMAM says you’ll probably want a regionally diversified approach in 2024.

European stocks are trading at an above-average discount across many sectors right now – and at a 30% discount to the S&P 500. The weak European economic environment seems to be fully priced into stocks – maybe overly so, when you consider the fact that European indices generate only 40% of their revenue at home. And if the global economy manages to bring down inflation with interest rate hikes while at the same time avoiding a recession (i.e. if it nails the soft landing), more cyclical regions such as Europe and emerging markets stand to benefit the most. For a Europe stocks play, the iShares MSCI Eurozone ETF (EZU; 0.52%) could be your jam.

What does the firm say about other assets?

Now, a bunch of stocks does not an entire portfolio make. And for 2024, JPMAM is advocating something that looks a lot like a traditional 60/40 portfolio (60% invested in stocks and 40% in bonds), but with some alternative investments thrown in for added diversification.

Bonds: the firm says it’s a great time to lock in some of the better yields that are currently on offer. Now, some of these yields are below current cash rates, but the firm says those higher rates will be fleeting. Those bonds, then, could be a good portfolio hedge, paying off handsomely if the recession does happen and with greater force than many anticipate. If you agree, then the iShares 7-10 Year Treasury Bond ETF (IEF; 0.15%) could be a good play, potentially while also adding some investment-grade corporate bond exposure into the mix, perhaps via the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD; 0.14%). Both have UCIT listings too, if you’re based in Europe.

Alternative assets: there’s still a risk that inflation, which has been on a downward slope, could move higher again and lead to a repeat of 2022 when both stocks and bonds fell sharply. So, in light of that worry, JPMAM suggests adding some alternative investments into your portfolio for a bit of extra diversification in 2024, highlighting real estate investment trusts, commodity strategies, and hedge funds as a few possibilities.

And if you’re still tempted by the yields on cash deposits – and I get it, they have been pretty nice this year – JPMAM included this chart in its outlook. And, yes, it clearly shows that over the longer term, cash is never king.

Cash is never king over the long term. The total annualized “real” return (after adjusting for inflation) of £1 ($1.26) in stocks, bonds, and cash. Sources: JPMorgan Asset Management, others as listed.

Over time, cash has always produced a negative real return. Bonds and stocks, meanwhile, have performed the best. Interestingly, since 2000, bonds and stocks both have an annualized return of less than 1% after adjusting for inflation. That’s because inflation undermines real returns – and we’ve had loads of that in the past couple of years. It’s no wonder everyone’s so motivated to bring inflation back down toward the 2% sweet spot.

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