J.P.Morgan Global Markets Outlook and Strategy

• The economy
Recession is over, in our view: here comes the recovery. The coming six months of manufacturing growth should be the strongest in two decades. EM Asia likely grew at an over 10% pace in 2Q. EM monetary easing is over. UK MPC to lead DM in rate hikes next year.

• Asset allocation
We stay in the recovery trade, Overweighting equities and credit versus government bonds. 3Q may bring a technical correction, but the downside seems limited vs greater medium-term upside. We try to diversify with positions based on RV, supply, and timing differences in exits from recession.

• Top assets to own, and to avoid
For medium-term long-only investors, our top buys include US High Grade financial bonds, High Yield loans, AAA CMBS, Korean and Taiwanese equities, and small cap value stocks in DM. Avoid government bonds, Eastern European equities, and CCC-rated corporate bonds. Hedge US dollar risk.

• Fixed income
Relative supply dynamics in 2H favour long EU vs US in 10s. Be long 2s in the US, EU, and Japan, where policy rates should stay low for long, but be short 2s in the UK, where inflation pressures are building.

• Credit
Rally to continue on improving credit quality, shrinking High Yield default volumes, and a 50% drop in net issuance in 2H from 1H. Stay long in US High Grade, US consumer ABS, US High Yield, and EMBIG credit.

• Equities
Stay long. Top trades are EuroStoxx50 2010 dividends and Consumer Discretionary vs Industrials.

• Currencies and Commodities
Stay short US dollar medium term. Overweight EM FX. Commodities are in a consolidation phase, but the medium-term outlook remains positive. Short oil tactically, cut longs in gold, and Marketweight neutral base metals.

• Volatility
Uncertainty on US inflation and fiscal health to affect rates more than equities. Long 3-month x 10-year swaption straddle vs short 3-month S&P 500 straddle.

• Hedge funds
Hedge funds are back on track, as they are outperforming traditional asset classes, taking more risk, and seeing net inflows. Hedge funds should earn 14% in 2009.