EM weakness may not prompt a DM recession

Weakness in the emerging markets will not cause a recession in developed markets, according to Stephanie Flanders, chief market strategist at J.P. Morgan Asset Management.

Flanders said that J.P. Morgan believed that portfolios should still have a modest tilt to risk assets, despite emerging market weakness, higher volatility and the poor performance of bond and equity markets in recent months. But she added that returns are likely to be lower and the case for a broad and flexible diversification is growing stronger. On interest rates, she said a rate rise in the UK and the US is still expected in the near future, but that short- and long-term rates will remain at historically low levels for a long time to come.

On China, Flanders said it would continue to cause market volatility, but added that the world’s direct exposure to China’s financial system is relatively modest. “The industrial side of the economy has seen a sharp slowdown but China’s services sector is looking stronger and offers attractive long-term opportunities for investors.” Flanders said that the recent recovery in Europe was due to a weaker currency, growing domestic demand and a pick-up in credit growth. She added that many corporates are sitting on large cash balances, which may be invested as confidence improves. Domestically-oriented companies have outperformed but still look undervalued relative to export-oriented companies and sectors, while corporate earnings are starting to improve in the Eurozone.