As the global economy becomes increasingly fragmented, J.P. Morgan Asset Management expects more cost shocks. As a result, investor diversification must include alternatives that offer real inflation protection. Learn more about it in the latest edition of the «Guide to the Markets».

 J.P. Morgan Asset Management’s «Guide to the Markets» provides client advisors and professional investors with targeted support for making the best investment decisions. 

Bonds are Back for Income and Diversification

Bond markets got a little over-optimistic earlier in the year about the prospect of imminent rate cuts, but have now reset back to more compelling valuations (Guide to the Markets – Europe page 67). Once again we can rely on core bonds to provide portfolio income and diversification from disinflationary shocks (page 70).

Staying Quality-Focused and Defensive in Stocks

Most developed world stocks are at or above historical average valuations on forward earnings forecasts that look a little optimistic given our expectations of weaker growth ahead (page 48). For that reason, we would look to focus on the quality segment of the market and dividend-paying stocks that are likely to be able to maintain dividends given low payout ratios (pages 53 and 51).

Don’t Let 2022 Recede Too Far From Memory

2022 was a painful reminder that cost shocks are as damaging for bonds as they are for stocks (page 70). With a more fragmented global economy dealing with challenges such as the energy transition, our expectation is for more frequent cost shocks (pages 85 and 87).

Diversification therefore needs to go beyond bonds to alternatives, such as core infrastructure and timber, which can provide genuine inflation protection (page 78).

Cash is Unlikely to be King

Investors face temptingly high cash rates, particularly given the numerous uncertainties ahead. However, we are increasingly confident that we are near peak rates (page 9). Following the peak in a Federal Reserve hiking cycle, bonds have outperformed cash on a two-year horizon in every instance over the last 35 years (page 73).