SINGAPORE (July 18): JP Morgan Asset Management (JPMAM) says strong fundamentals, backed by sustained economic growth, will be supportive of equities in the third quarter.

However, JPMAM also recommends investors to remain cautious over fixed income amid rising bond yields.

In a media release issued on Tuesday, Jasslyn Yeo, Global Market Strategist at JPMAM, says economic growth for most major developed market and emerging market countries are still running above trend.

This is despite inflation being softer than expected and economic leading indicators like Purchasing Managers’ Indices (PMIs) showing some moderation.

“The risks of a recession remain low over the next 12 months,” says Yeo.

Yeo also warns that increasingly frothy valuations could turn into headwinds for further gains in the third quarter despite positive monetary policies for fixed income in 1H17.

Investors have been questioning whether the asset markets can continue to rally, following hawkish rhetoric by major central banks in the recent weeks.

The US Federal Reserve balance sheet reduction shows a gradual withdrawal of qualitative easing (QE) where most of Treasury holdings maturing next year will still be reinvested due to the Fed’s reinvestment cap.

“Based on our projections, total G4 central banks’ balance sheets will only start to contract in late 2018. Meanwhile, financial conditions remain accommodative and supportive of the real economy and asset markets,” says Yeo.

Inflation should pick up in the second half, says JPMAM, as the US labour market continues to tighten and the US dollar weakens over the past few months.

JPMAM advises investors to consider how much protection the various asset classes held offer against higher bond yields, as valuations are now more challenging, especially in the fixed income space.

Within the fixed income space, JPMAM sees opportunities in emerging market (EM) local currency debt as fundamentals remain positive and recommends focusing on high-yielders such as Brazil, Russia, India and Indonesia.