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JPMorgan’s Michele Says Forget Bubble Fears and Ride the Rally

Anchalee Worrachate
·3 min read

(Bloomberg) -- Bob Michele has bad news for everyone on Wall Street and beyond sounding the alarm on asset bubbles: there’s more credit euphoria to come.

The chief investment officer at JPMorgan Asset Management with $2.3 trillion overall is betting on an ever-more intensifying rally across junk bonds, emerging market debt and risky bank securities, as fresh stimulus beckons.

Michele says average U.S. junk-bond spreads are set to drop to 300 basis points, and over the course of the next year could test pre-financial crisis lows of 250 basis points. Instead of worrying about lofty valuations, he’s telling clients to ride the rally and drown out warnings that the market has become overheated.

“Some want to wait until there is a meaningful correction. I keep telling them that everyone on the planet is waiting for that to happen,” Michele said in an interview. “Valuations occupy everyone’s time and effort. Nobody likes them here. But that’s the reality.”

The rally has prompted hand-wringing from Wall Street to Washington that stratospheric gains have gone too far and investors are more complacent than at any time since the eve of the dot-com bust. The International Monetary Fund waded into the debate last week, warning that risk assets were over-valued with no cushion built in for negative surprises.

But with global central banks plowing trillions into market and fiscal stimulus stoking economic recoveries, there’s no reason to pull back now, according to Michele.

Michele jumped into the reflation trade early, pivoting into corporate bonds and emerging markets debt pegged to growth last year. Betting on assets tied to growth and inflation is shaping up to be 2021’s hottest trade, with the Democratic Blue Sweep of U.S. legislative houses insuring easier passage for Joe Biden’s pandemic aid package.

Some other forecasts:

10-year yields will continue their march higher to trade in a 1.5%-2% range, but inflation-adjusted yields will remain negative, fueling the rallyU.S. corporate default rate will fall to 3% from 6% this yearA basket of local-currency debt including from South Africa, India, Indonesia and Mexico could net 10% gains this year

Prescient calls on the enduring bond bull run helped the Global Opportunities Fund Michele runs with colleagues outperform 85% of peers in the past year, according to Bloomberg data.

Michele sees the next Federal Reserve rate rise in 2023, when a pick-up in inflation and growth puts central banks back on the tightening path. Until then, relentless stimulus -- what he dubs “Modern Monetary Theory on steroids” -- has set up a perfect backdrop for risk assets.

“The reflation trade still has a lot of room to go,” he said. “Central banks are printing more money every day and that money finds its way into the market. This is not going to stop anytime soon.”

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