J.P. Morgan backs emerging market debt

The run-up to the US elections and the international investment markets of Asia and Latin America offer hope to investors in 2012, says J.P. Morgan Asset Management

In the run-up to the US election, both fiscal and monetary policy is likely to stay expansionary, predicts J.P. Morgan Asset Management. The investment house believes investors will continue to remain “indulgent” about the country's level of indebtedness as the Treasury market is still unrivalled in its size and liquidity.

Further afield, a continued recovery for Japan from the earthquake and tsunami is forecast. Elsewhere in Asia, J. P. Morgan Asset Management predicts growth will slow as trade with Europe drops, but it believes GDP expansion will still outstrip any other region of the world. Furthermore, investors will find further comfort in the forecast that Latin America's commodity exports to China will continue and rising internal demand will benefit both Brazil and Mexico.

The asset classes that the investment house believes offer the best potential returns over the next year include higher yielding fixed income, such as emerging market debt in both US dollar and local currency, as generous coupons, falling risk aversion and appreciating currencies all argue for positive total returns.

Corporate high yield debt also looks attractive to J. P. Morgan analysts, as they see companies generally having sufficient cash to make interest payments and current spreads suggest a much higher default rate than generally thought likely.

Furthermore, equities should recover some of their losses from 2011 as the outlook in Europe improves and valuations are attractive, but earnings growth will be hard to come by, moderating gains. And, finally, stocks with better dividend yields should provide some additional cushion.

On the Eurozone debt crisis J. P. Morgan Asset Management warns that, even were a definitive solution to be found soon, enough economic damage has already been inflicted on all member states to result in lower growth next year.

“After years of lax fiscal policies, the planned cuts in debt-to-GDP ratios means a fiscal contraction of €150 bn in 2012, with more to follow in subsequent years. Growth will be fortunate to reach 0.5% and the reforms required to boost economic competitiveness will take years to bear fruit. The adjustment in the UK will be similar and with global growth weak the country cannot rely on exports to offset the domestic contraction,” according to analysts.

www.jpmorganassetmanagement.co.uk