The J.P. Morgan View Fade the growth trade and instead focus on value:: JPMorgan

 Asset allocation –– We are not taking part in the growth trade of the past
two weeks (rally in Cyclicals and commodities plus sell off in bonds) as we
see little reason to upgrade growth forecasts. Our strategy is instead a valuebased
capturing of high risk premia in equities and HY in a world of low
market and economic volatility.
 Economics –– Better US jobs data and German IP and orders reduce
downside risk biases on Q2, but are not enough to create upside risks.
Forecasts are unchanged.
 Fixed Income –– Selloff can only go a little further with monetary policy so
supportive.
 Equities –– We fade the Cyclical rally. We have not yet seen concrete
indications of a rebound in global manufacturing.
 Credit –– We stay up-in yield globally, duration hedged, with a preference
for the dollar markets.
 Currencies –– We keep a short JPY basket vs USD and the commodity
currencies and go short CAD vs USD as it appears expensive to us.
 Commodities –– We stay bullish natural gas prices on its increasing use for
power and transportation, and the rising possibility of US gas exports.

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 Financial markets appear to have been positioning for a rebound in global
growth over the pasty two weeks. Ten-year UST yields are up almost 30bp,
cyclical stocks are suddenly outperforming, and commodity prices have
rebounded from their lows.
 The support for this growth trade is in our mind quite flimsy and
appears based on just two weekly US claim reports, a not-as-bad-as-feared
US Payrolls, and stronger German factory orders and IP for March. We see
no reason to upgrade our modal global growth forecasts, with recent upside
surprises merely reducing the downside risks we have been signaling earlier.
Instead, we suspect that the recent market moves in growth sensitive assets
reflect more a cutting back in positions by market participants who had
expected a repeat of the growth downgrades we have seen at this time in
each of the past three years.
 We are thus disinclined to follow the growth trade of buying growth
sensitive assets, and instead focus on the value trade of earning
attractive risk premia on our view of low macroeconomic volatility. We
like equities, especially in the US and Japan, and remain overweight higheryielding
fixed income across DM and EM. We stay broadly overweight
credit and equities against cash, commodities and safe government debt.
 The growth trade of the past few weeks has raised a lot of questions, though,
on what a sudden reversal in easy money and in particular the Fed’s QE and
zero-interest rate policy (ZIRP) will do to markets. An early end to QE/ZIRP
is not our modal view which remains that the Fed will taper its QE buying
flow of $85bn a month during H1 of next year, with the first outright rate
hike would only taking place in H2 of 2015.

 Against this modal view, consider what would happen if the tapering takes
place in H2 of this year and the first rate hike happens in Q1 2014. We will
lay down some principles of how to gauge this risk scenario instead of
detailed forecasts as our first principle is that one avoid simply extrapolating
past Fed tightening episodes, such as ‘94 and ‘04-07. Each cycle is different.
 The second principle is that market impact depends on what brings about the
reversal in policy. If induced by a surge in inflation or inflation expectations,
then it is bearish all nominal financial assets, with only select real assets such
as precious metals and real estate benefiting. A more likely cause of a reversal
in easy money would be a surge in growth induced by capital spending. That
favors cyclical stocks and commodities against bonds and bond-like stocks.
 The third principle is that the magnitude of the impact depends on how fast
the reversal is, and how long the preceding period of easy money had
lasted. A ‘94-type of fast hiking does a lot more damage than a slow pace as
in ‘04-07. Most important here is that this reversal would come after an almost
6-year long period during which market participants have become
accustomed, and leveraged, if not addicted, to easy money. For the same
reason, the Lehman crisis did so much damage because it came at the end of
20 years of Great Moderation that had lulled markets into complacency.
 To judge where a monetary policy reversal does the most damage, we must
thus understand what behavior and markets are most leveraged to a
continuation of easy money. In simple terms, assets and markets that
benefitted the most from easy money are most vulnerable to its reversal. To
this analyst, search-for-yield assets are most vulnerable, while equities,
commodities and EM currencies are much less vulnerable, and might easily
rally in this risk scenario. Watch out for long-duration bond markets with less
liquidity that have grown at a fast pace during the QE/ZIRP period.
Fixed Income
 Growing perceptions of a stronger US labor market, with the attendant
implications for Fed policy, triggered the largest one-week selloff of the year
in govies. Although the US claims and payrolls data have been encouraging,
and that bearish tilt to bonds may have a little further to run, our forecast is
still that December is the most likely date for an announcement on the
tapering of Fed asset purchases. The biggest impediment to significantly
higher yields is that higher short rates are a far distant prospect, so that the
carry from short positions will remain punishing: our US and Global rate
weeklies accordingly detail carry-efficient alternatives to outright shorts.
 The global shift higher in yields swamped other market drivers. For example,
Australian yields backed up sharply despite the RBA's unexpected ease, to a
record low policy rate. Domestic economic weakness means that the risk is
biased towards more than one further cut now in our modal forecast, and thus
to Australian outperformance cross-market.
 Most strikingly, Japanese 10-year yields spiked to their highest level since
February, reflecting in part a surging Nikkei and concerns over the prospects
for inflation, in an environment of diminished JGB liquidity. Our forecast is
still that the weight of BoJ buying will bring JGB yields lower once more.
 The ECB is flirting with far less radical monetary experimentation than in
Japan. We think that at the least the Euro area recession would need to linger
over the rest of the year for the Euro area to follow Denmark and Switzerland
on the path to negative nominal rates, but this possibility means that euro
money market rates are biased lower.

Equities
 Global equities continued to rise posting new cycle highs. The MSCI AC
World index 13% away from its all time high of 427.63 recorded on the 31st of
October 2007.
 Better macro data this week, following last week’s reassuring US payroll
report, induced investors to buy Cyclical sectors. But we believe that for this
week’s Cyclical sector outperformance to be sustained we need broader macro
data improvement, especially with respect to manufacturing sector data, which
is yet to be seen. We stay underweight Cyclical sectors in our model portfolio
as a protection to still weak manufacturing indicators, especially as we are
long equities overall.
 This is a tactical view and is not to say that we are long-term bears on Cyclical
sectors. A case can be made to favor Cyclical sectors longer term. Our US
Strategist Tom Lee compares the current bull market with those of 1980s and
1990s (see Circle of Life - Is this the 80s or the 90s?, May 10).
 Defensives dominated the 1980s bull market; Cyclicals in the 1990s. Tom Lee
is arguing that the current bull market is more like the1990s. The 1980s saw
declining durable goods spending (as a % of US GDP), while the 1990s saw
the largest boom in durable spending since WWII. The durable goods outlook
today seems to him closer to the 1990s. Naturally, the cyclical sectors of the
economy benefit from rising durables spending. As a result, he believes
Cyclical leadership will be the three- to five-year story, with Technology the
least consensus and therefore perhaps best positioned. Not all Defensives
are set to underperform. From within Defensives, the most attractive is US
Health Care due to grater earnings stability.
Credit
 Spreads continue to rally and US high-yield extends its outperformance.
YTD total returns of almost 6% in US HY compare with around 2.5% for
CEMBI, 1.6% for US HG, and 1% in EMBI. All-in yields also breached
some key milestones this week with US HY hitting 5% and Euro HY falling
just below 6%. The most recent rally in high-yield credit – the strongest since
December – has also attracted more capital to high-yield bond and loan funds
with inflows further strengthening this week.
 Despite lackluster economic data so far this year, strong demand and falling
yields have kept primary markets active. US High-yield bond issuance is
running ahead of last year’s pace and we raise our full-year forecast for gross
issuance to $325bn, from $275bn. We also raise our full-year forecast for loan
issuance by $200bn to $500bn as YTD issuance already ranks as the fourth
largest full-year volume and is easily on track to be the highest on record.
Similarly, European currency high-yield issuance now stands at $35bn YTD,
already running close to 2011 and 2012’s full-year numbers.
 With several central banks having eased recently, and most biased towards
further easing, flows into credit funds were generally strong this week,
particularly in US HG, but also in local currency EM bond funds where yields
have declined sharply. Yet US HG spreads continue to lag and, based on
historical trading patterns with other markets, we believe they should be
around 25bp tighter (see CMOS). This is despite US HG investors becoming
increasingly bullish according to our client survey. We stay up-in yield
globally, duration hedged, and with a preference for US and Asian dollar
denominated markets.

Foreign Exchange
 As has occurred about twice a year during the post-Lehman era, a global rates
sell-off is ripping through currency markets. Month-to-date, 10-yr Japan is up
11bp, Germany and Australia +13bp, UK +18bp and US +21bp, while the
dollar has rallied versus 70% of currencies (exceptions this month have been
NOK, CNY, MXN, MYR and PEN). FX correlations, which had fallen to
multi-year lows in the presence of numerous country-specific events this year,
have popped higher, as one of the world’s most dreaded systemic events – the
end of ultra-easy Fed policy – takes root due to a firming US labor market.
Pre-positioning for the end of QE is sensible even as the announcement of the
start of tapering would only come in Q4. Prepositioning for the end of easy
money is not, since changes to funding rates are two years away, over which
time a lot of current weakness outside the US will likely reverse. If tapered
QE3 is the only adjustment to Fed policy over the next six months, 10-yr US
yields may not break this year’s range and the trade-weighted dollar would be
unlikely to rally more than another 2%. In the interim, a lot of the non-US
cyclical weakness which has characterized 2013 is likely to reverse.
 As a result, we are adjusting trades this week but not forecasts. We have been
short USD versus KRW and CNY, so roll the long KRW into JPY funding
and take profits on USD/CNY. Also switch long MXN from USD to JPY
funding. Keep a short JPY basket vs USD and the commodity currencies.
Other longs in commodity currencies were too concentrated against USD, but
since they were cheap option trades with several weeks to expiry, we hold
these positions. Add selective USD longs vs CAD, since the latter is the most
expensive major currency on short-term fair value models.
Commodities
 Commodities are slightly up this week as small gains for energy and base
metals offset a fall in precious metals and agriculture. Commodities have
now reversed almost two thirds of the correction that started at the end of
March, driven initially by energy and more recently by a strong rebound in
base metals. The recent rally has also pushed both oil and copper into
backwardation (downward sloping curve). That this has happened across
energy and base metal markets suggests that this is more related to demand
than idiosyncratic supply issues affecting any specific commodity. However,
economic data for April have been somewhat mixed so far with
manufacturing data surprising on the downside but employment data
surprising on the upside, while consensus forecasts for global growth are
unchanged so far this year. This lack of direction in economic growth
expectations makes us wary of following the short-term momentum in
commodity prices and we stay underweight and focus on relative trades within
commodities. Stay long energy vs. base metals, Brent vs. WTI and in
Brent time spreads.
 Year-to-date, US natural gas prices are up over 12%. Colder than normal
weather over the past few months coupled with slower domestic production to
push prices higher. As the weather improved recently, prices have given back
some of their earlier gains but we think the downside is limited and expect
prices to resume their upward trend as we head into the summer. Three key
themes keep us long-term bullish US natural gas. Heavy industry and
households continue to switch from coal to gas for power generation; natural
gas is being increasingly used as a transportation fuel over oil products; and
we believe the likelihood of eventual US exports is rising. Stay long.