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JP Morgan AM plans for a year of two halves

A benign economic outlook will support growth strategies for the first six months, after which investors should consolidate gains, according to JP Morgan AM's Asia strategist.
Tai Hui, JP Morgan Asset Management

“The upward momentum for risk asset prices is likely to continue during the first two quarters of this year, so we are positioning for growth,” said Tai Hui, Asia chief market strategist at JP Morgan Asset Management

At a media roundtable in Hong Kong on Friday, he recommended allocating to developed and emerging market equities, as well as corporate credit and emerging market sovereign debt.

Hui’s more positive stance contrasts with a more cautious strategy entering the final quarter of last year when he favoured low-volatility investment grade bonds and warned that equities were “range-bound”.

In terms of valuations, US equities, especially technology stocks, are expensive, “but they are expected to deliver strong earnings growth over the next few months, which will drive markets higher,” he said.

“Asia will also deliver higher earnings, led by South Korea and Taiwan semiconductor exporters whose sales will be lifted by demand for 5G inputs, while other sectors should be boosted by tailwinds generated by the phase one trade deal between signed by the US and China this month.”

Credit spreads are below their 10-year historical average for all sub-sectors, except US dollar-denominated Asia high yield where the mean spread of 509 basis points (bps) is 60bp wider than the historical average, according to JP Morgan AM research.

“But, spread can compress further as government bond yields are likely to be fairly static,” said Hui.

Spreads for emerging market bonds, both local and hard currency, are trading close to their 10-year lows, but Hui expects the dollar-denominated emerging bond segment to remain strong as investors seek incremental yield in a low interest environment.

Meanwhile, local currency debt should be buoyed by a slightly weaker US dollar and the ability of central banks in several emerging markets — including in Asia — to cut interest rates in the face of weak inflationary pressure.

Consolidation later in the year

Hui’s bullish strategy is predicated on an improvement in corporate confidence represented by an uptick in the global purchasing managers’ index (especially in Asia), inventory replenishment after a year of de-stocking in several industries, including technology, a demand for 5G components such as semiconductors, and a rise in US corporate earnings fuelled by a healthy domestic consumer sector.

Meanwhile, the signing of the phase one agreement this month should diffuse the more extreme rhetoric of the Sino-US trade dispute ahead of Trump’s presidential re-election campaign, and China’s economic growth should be bolstered by effective monetary and fiscal stimulus measures delivered last year.

“The risks are now on the mainly on the downside, yet the fears of recession that pre-occupied central banks are not so strong now after a year of interest rates in both developed and emerging markets, ” said Hui.

Meanwhile, “geopolitical risks are now the norm, and investors are becoming accustomed to them,” he added.

Although a pick-up in inflation is highly unlikely, labour shortages in the US and Asia, a sudden surge in demand for goods and services, and commodity – especially oil — price rises could stoke inflationary pressures in some emerging market countries and force their central banks to change course and hike rates, according to Hui.

“But that is an outlying scenario,” he said.

Nevertheless, Hui expects that the second half of the year will experience stabilisation, as markets pause for breath and investors assess the economic environment and prospects.

Hui would then look to consolidate gains, and build a balanced portfolio of investment grade fixed income and quality stocks.


JP Morgan Asset Management Portfolio Construction

Conservative

Balanced Aggressive

High yielding

DM equities

10%

30% 20% DM HD* equities

25%

EM equities

5%

10% 40% EM HD equities

10%

US HY bonds

10%

15% 10% APxJ HD equities

10%

US IG bonds

25%

10% 5% US HY bonds

20%

Cash

35%

10% 0% EMD

15%

EMD**

10%

15% 5% Asia bonds

15%

Reits

5%

10% 20% Reits

5%

Source: JP Morgan Asset Management, 31 December 2019
*high dividend; **emerging market debt

Part of the Bonhill Group.