Investors should sit on the fence and build balanced portfolios while the outcome of the U.S. China trade war remains in the balance, JP Morgan Asset Management has warned.
Wall Street closed at record highs on Wednesday ahead of the Fourth of July holiday following a trade war truce between the U.S. and China at the weekend.
Growing expectations that the Federal Reserve will cut interest rates this year also helped all three major benchmarks to set record closes.
But JP Morgan has told clients to build up a balanced portfolio as the outcome of the trade dispute between the world’s two largest economies remains up in the air.
China Commerce Ministry spokesman Gao Feng confirmed the two nations had restarted negotiations on Thursday but warned existing U.S. tariffs would have to be scrapped for a deal to be struck, signaling the potential hurdles in the talks ahead.
The asset manager’s global market strategist Mike Bell said the dilemma for investors was whether prospective rate cuts would extend the economic cycle or be “too little too late”, leading to an economic downturn.
“A large part of the answer to that dilemma unfortunately lies with what happens with trade where there is very limited visibility,” he said.
Recent economic data, including declining U.S. business surveys and deteriorating global manufacturing surveys, wasn’t painting a positive picture, Bell said, but the market has been willing to overlook that due to the prospect of rate cuts.
The advice to clients has been to avoid any big overweight or underweight positions on stocks and low quality, expensive stocks, while focusing on equities likely to outperform if economic data continues to weaken.
Treasuries could also provide some hedge to equities, the asset manager said, or other traditional safe havens such as the Japanese yen and gold.
“It is a very difficult environment for investing where big overweight or underweight positions, while uncertainty lasts, are a risk,” Bell added.
“It doesn’t feel very satisfactory because it feels like sitting on the fence — sometimes if your conviction is lower it makes sense to reflect that in portfolios, rather than continue to run the same level of overweights to equities as you would have done when the data was stronger and the political risk was less.”
The asset manager also warned that Europe was most vulnerable to the ongoing trade uncertainty.
While that uncertainty rumbles on, investors may just have to sit on the fence that bit longer.
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