A JPMorgan heavyweight who advises a $1.7 trillion business breaks down the perfect blend of international investment for the next 5 years - which he says will guard against a recession
- David Kelly of JPMorgan Asset Management says he thinks international stocks look more appealing than US stocks over the next five years.
- He breaks down how investors should balance their portfolios inside and outside the US, and in emerging and developed markets.
- US stocks have dominated in the past decade, and Kelly says other areas have more potential for growth along with lower valuations.
- While he's not predicting an imminent recession in the US, he says there will probably be one within that five-year period.
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US stocks have ruled the world for years, and there are experts who think that's going to continue for a long time to come.
David Kelly, the chief global strategist for JPMorgan's $1.7 trillion asset management arm, isn't one of them.
In evaluating the markets over a five-year time span, Kelly breaks the situation down this way: US stocks have outperformed because the economy is at full employment with high labor force participation and the dollar is strong.
But within a few years a recession is likely, and other regions offer more room to stay afloat when the inevitable downt
"Say in the next five years we have a recession and we have a recovery, and the US economy does slow down to 2% growth and the world economy does pick up to something faster," he told Business Insider in an exclusive interview. "International does look better than the US. I think emerging markets look better than the developed world."
In evaluating where to invest based on that outlook, he notes that investors are dramatically overweight US stocks, as the US makes up about 25% of the global economy, but according to Morningstar it's 54% of global stock market capitalization.
"A reasonable investor in the United States should feel comfortable having at least 45% of their equity money outside the US, and having half their equity money outside the US is fine," he said. "Once we turn the tide on trade conflict and a move more towards a trade peace, I think the rest of the world will begin to do better."
Kelly suggests investing about two-thirds of that money in developed markets, emphasizing that a lasting trade truce between the US and China would help international stocks a great deal. He also thinks European countries will finally adopt fiscal stimulus measures to strengthen their economies.
"Europe has got more cyclical room to grow" than the US, he said, adding that several other factors contribute to his optimism. "Europe is running a trade surplus and the US is running a trade deficit, which should bring the euro up and the dollar down, which would tend to amplify the current trend in European investment."
Simple ways for investors to to get exposure to those areas include the iShares Core MSCI International Developed Markets ETF and iShares Core MSCI Emerging Markets ETF.
Along with their low valuations, Kelly said a couple of major trends are going to help emerging markets stocks over the next five years, including the growing Asian middle class.
"They've just got better population dynamics, better productivity dynamics, they'll grow faster," he said. And even though he expects the trade war to end, he says it's started some lasting trends that will help Asian countries at China's expense.
"There's going to be continued pressure on China and continued pressure to move manufacturing out of China and into other regional players," he said. He named Malaysia, Vietnam, Thailand, and Indonesia as the biggest beneficiaries of that shift and said South Korea and Taiwan will be helped as well.
He also said valuations of Indian stocks are higher compared to those countries, but there are still opportunities to be found there.
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