>Dull is good (J P MORGAN)

• Portfolio strategy –– The most important event for our strategy in coming months is that nothing happens, or better, nothing surprises and volatility and risk fade. This means a further flight out of cash into bonds and equities. We stay short cash against high-yielding assets.

• Economics –– Global forecast is on track for recovery, with growth at 3.7% in H2

• Fixed Income –– We are trading the range, carry and yield compression

• Equities –– Banks are benefiting from asset reflation, a stabilization in housing prices and the prospect of dividend increases next year.

• Credit –– A new regulatory framework is likely to alter the hybrid capital market in Europe. OW Tier I issued in 2009, UW Tier I with call after 2011.

• FX –– Rising risk of dollar upward correction. Take part profit on USD shorts.

• Alternatives –– Investors interest in hedge funds is increasing.


■ A sense of calm has started to pervade markets, with many assets now moving in narrow ranges and others just trending gently. This may not be great for active managers, but is heaven sent for the rest of us after all the fireworks of the past two years. It reduces the destructive urge to delever our finances all at the same time, and helps rebuild markets and asset values. It keeps us short cash and long assets that pay income.

■ The message from economic data is that a global recovery is taking hold and is spreading. Many investors still doubt it is sustainable. We believe it is, at least through next year, and find it too early to speculate about what happens afterwards. Our own growth forecasts are in stationary mode, as there is no need to upgrade projections with data tracking well. The consensus of forecasters still lags our growth numbers, but we sense that most active managers
have already bought into the recovery story. Indeed, our US surprise index is hovering around neutral now. Hence, our strategy is based less on any further upgrades of growth forecasts and more on a sense of stability.

■ Stability is most painful for assets that thrive on fear. That means cash. Since March, we have seen a steady and global flow out of cash into assets with a proper yield –– equities and bonds. This is not over. An informal look at the global portfolio share of cash (Chart p. 2) hints that with cash returns staying at zero, we are probably only half way into the move out of cash.

■ The main recipient of flows out of cash has been bonds, as the yield pick up from cash was most stark, especially to banks where demand for corporate loans is falling. But the flow into bonds should ultimately be self destructive as it steadily lowers future potential returns. The average yield on the Barcap.

To see the full report: JP MORGAN VIEW