JPMorgan’s Karen Ward on beating the ‘extreme’ markets

LONDON — “The only thing I know is that I know nothing,” goes the famous saying, often known as the Socratic paradox.

The expression could well be applied to what’s going on in financial markets right now. With the US economy going gangbusters and earnings following suit, investors have a lot to be positive about. At the same time, however, the spectre of US President Donald Trump’s trade war looms large.

“For investors at the moment, the trickiest thing is working out whether to pay any attention to the current data or current earnings,” Karen Ward told Business Insider in an interview last week.

Ward is the chief market strategist for the UK and Europe at JPMorgan Asset Management, which manages around $1.7 trillion of clients’ money.

“If you look at the current data, certainly in terms of earnings, even outside of the US things look good,” she said. “Within the US things look absolutely extraordinary. If you only focus on the hard information that we have now, risk assets look cheap.”

But she added: “Obviously, what’s difficult for investors is working out whether that’s just looking in the rearview mirror. Whether, actually, the trade issue is going to escalate, such that all of this current good news is going to fade over the next six months, and put an end to, if not growth in the US, at least growth outside of the US.”

‘This is very much trying to read the minds of the US electorate’

Ward’s comments came last Wednesday just before President Trump and European Commission President Juncker met for crunch talks on the future of US-EU trade. Trump had threatened painful tariffs against European auto imports to America. The talks were a qualified success, with the EU agreeing to import more American soybeans and liquefied natural gas, and both sides agreeing to work to decrease industrial tariffs and adjust regulations to allow US medical devices to be traded more easily in European markets.

“This was a very big day for free and fair trade,” Trump said at a press conference after the pair’s meeting.

Last Wednesday’s agreement put the trade war threat on the backburner in Europe. But Trump is notoriously volatile when it comes to policy, especially when he believes it could influence his core voter base.

That makes assessing the global market climate incredibly difficult, Ward said, regardless of what looks like a de-escalation of the trade conflict.

“We’re into the realm of trying to put some kind of assessment on probability on what happens in the trade debate, and that’s extremely difficult, because this is very much trying to read the minds of the US electorate, and trying to understand how these policies are falling in their voting intentions,” Ward told BI.

With midterms approaching in November, President Trump will likely focus his efforts for the rest of the year on a strong showing in those elections. Whatever policies he think will be most likely to maintain — or even boost — his current level of popularity, will be the ones he doubles down on.

“Is this more aggressive style the US is playing in the global economy — this more autonomous, more dominating position — vote winning?” Ward said.

“At the moment [Trump’s aggressive policy on trade] seems to be more than palatable,” Ward added, saying that because of this “extremely binary” set of outcomes, managing a portfolio is extremely difficult right now.

On the one hand, there’s the possibility that things continue to improve in the US economy and Trump backs down from his trade war. On the other hand, he could escalate trade tensions further, causing both national and international economic damage.

Liquidity, liquidity, liquidity

How should investors mitigate those two outcomes?

“It argues for very clever portfolio management,” Ward said. “Having hedges in that are going protect you in different scenarios is the best we can do right now.”

Ward’s recommendation, for the time being, boils down to a single word: liquidity.

“Being liquid is perhaps the best advice. Knowing you are able to shift your position quickly is the best advice we can give people right now.”

Ward’s advice stems from the extremely fast-moving nature of events in 2018. Last week, for example, prevailing opinion shifted from an escalating trade war with Europe to a ceasefire within hours of Juncker and Trump’s meeting. It could just as easily shift back the other way at any moment.

Investors should also look to move more of their portfolios into bonds, Ward said.

“You certainly want to bring your overall level of risk down. You want to think about adding more fixed income to those portfolios,” she said.

But she added: “You need to be a little bit careful about what within the fixed income space you are allocating to. For example, if you shift towards an outright position of being long duration, it becomes much trickier if risk reappears and we’re back to focusing on inflation pressure and an overheating US economy, and much higher interest rates.”