Tags: Kelly | stocks | bonds | oil

JP Morgan's Kelly: Invest in Stocks Despite Potential for Short-term Losses

Tuesday, 03 Sep 2013 10:12 AM

By Michelle Smith

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Short-term risks may create turmoil and losses, but it's better to invest than to be on the sidelines, says David Kelly, chief global strategist for JP Morgan Funds.

In an interview with The New York Times, Kelly notes he is vividly aware of the short-term risks. There's the likelihood of battles over the budget and debt ceiling in Washington, the potential for military intervention in Syria and expectations the Federal Reserve will taper its stimulus programs this month.

"There are many problems in the economy and in the markets, certainly," Kelly tells The Times.

Editor’s Note:
Put the World’s Top Financial Minds to Work for You


"But the answer for a long-term investor isn't to avoid risk," he says. "It is to be extremely diversified — and to invest in equities. You're likely to do much better that way than if you stay out of the markets."

Kelly admits "we could have some very difficult moments," and "the one thing you can expect is volatility." But the only assumption to be reached is that "the markets will rebound quickly, even if they fall."

The global economy is "more balanced" than it was in the midst of the financial crisis. Developed nations, such as the United States and Germany, have stabilized their economies and that has reduced the risk of over-relying on emerging nations.

Relatively low interest rates are making stocks in those developed nations more attractive than bonds, Kelly notes. Pointing to the difference between the yield on 10-year Treasurys and German Bunds and the earnings yield on equities, he advises being overweight in U.S. and German stocks, while being underweight in those nations' bonds.

If interest rates rise, Kelly expects stocks to remain the better buy over the next few years, as long-term bondholders are likely to see losses.

However, it's important to avoid "overselling the probabilities of any one investment being successful in a given period of time," he tells The Times.

"If you perceive that risk is rising, then you need to be extremely well-diversified, because no one can predict which asset will rise and which will fall in any given time."

While Kelly advises long-term investors to avoid being invested in just one just one asset class, he explains that the best strategy is to focus primarily on valuation, not momentum.

And he warns against bets on the direction of oil and gold, "the ultimate speculative asset."

Others are also encouraging caution in these markets.

Conflict in the Middle East boosts the price of oil, but after past spikes, it has typically declined to pre-crisis levels or lower, Peter Buchanan, an economist at CIBC World Markets, warns in a recent report, according to MarketWatch.

Military escalation in Syria could be bullish for gold, likely pushing prices over $1,400 an ounce. But "gold rallies based solely on geopolitical events tend to be short-lived" HSBC analysts warn, MarketWatch reports.

It's easy to be "wrong-footed," assuming an asset class will rise when it is about to fall. Short-term bets are unlikely to be productive for most investors, Kelly tells The Times.

Diversified holdings of stocks and bonds that bet on economic growth are best even in risky times, he argues.

Editor’s Note: Put the World’s Top Financial Minds to Work for You

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