(Bloomberg) - The narrative propelling the global stock rally since mid-March goes like this: The US economy will hold up fine in the face of higher interest rates, and China’s stimulus efforts will help keep that nation’s post-pandemic recovery chugging along.
Shrenick Shah, co-manager of the €3.5 billion ($3.9 billion) JPMorgan Global Macro Opportunities Fund, isn’t buying it. Weakness in manufacturing, tightening liquidity and tougher credit conditions all point to a contracting US economy, and optimism about China is unwarranted, he said in an interview last week.
Over the past six weeks, the fund has put on bets that US and European stocks will fall, including a derivatives position that pays off if technology stocks decline. It’s also loaded up on government bonds, he said. For now, his pessimism is costly.
“We think the US is in a contraction,” Shah said. “We see a clear weak industrial or manufacturing cycle that is also clear across the rest of the world. Those views led us towards being short riskier assets and long sovereign bonds.”
Shah’s take reflects the view among some investors that stocks and the economy can’t possibly hold up in the face of the campaign by central banks to rein in inflation by raising interest rates. One major red flag: Yields on short-term US government debt are well above those on longer-dated bonds, a so-called inverted yield curve that has a long record of correctly predicting recessions.
Yet the market has defied the skeptics. The MSCI World Index has returned 14% this year, while the frenzy surrounding artificial intelligence has pushed the Nasdaq 100 Index up by 39%.
JPMorgan Global Macro Opportunities has lost 7.3% over the past month, while an index that tracks short-term cash has returned 0.3%.
“It’s a bit painful to sit in that right now,” said Nicola Rawlinson, lead investment specialist for macro strategies at JPMorgan Asset Management, but the team is convinced that the reality of the economic picture will eventually kick in.
The fund has wide latitude to invest in stocks, bonds and derivatives based on its analysis of global economic trends, with a goal of beating the return that an investor can achieve by holding cash. It’s returned 3.6% annually over the past decade through May 31, outpacing the annualized 0.2% drop in its benchmark.
Shah says clients are comfortable with the fund’s positioning, and his team is looking at the situation with an open mind.
“If the fundamentals shift then, then we’ll shift our views clearly,” Shah said, adding that he will keep a close eye on liquidity and second-quarter results, particularly in tech, industrials and banking.
By Julien Ponthus
With assistance from Jan-Patrick Barnert
