Investors might be deterred from leaving the haven of cash amid so much economic and geopolitical uncertainty, but they risk missing superior cumulative returns.
“During the past two years, investors have preferred the high yields of cash over other asset classes. However, bonds and equities will likely perform better than cash in the long-term, and even in the next 12 months,” Yvonne Leung, managing director and head of managed solutions at JP Morgan Private Bank (JPMPB) in Asia, told FSA in an exclusive interview.
The clear message from JP Morgan Asset Management’s (JPMAM) latest 10-to-15 year long-term capital market assumptions (LTCMA), published earlier this year, is that as investors navigate a world in transition, it is important to build smarter portfolios by extending out of cash and benchmarks, expanding opportunity sets into alternatives and adding greater international exposure for better diversification and returns.
“It is critical to have our clients’ investment portfolios mapped out against the LTCMA’s predictions to understand the risk-reward potential beyond both one cycle and over a 10-to-15-year period,” said Leung (pictured).
The LTCMAs “help identify new and review existing investment opportunities unique to each client’s long-term goals – considering liquidity, lifestyle, legacy and growth objectives,” she added. In particular, alternatives, such as private credit and global infrastructure, provide clients with an extra layer of diversification and typically a boost to their investment returns.
Based in Hong Kong, Leung works closely with advisers and portfolio management teams in delivering core multi-asset managed solutions to clients and prospects in Asia.
JPMPB has an open architecture platform, with several hundred funds and strategies available to its clients. Funds are analysed within the “four pillars” framework: process, performance, people and philosophy.
Leung’s main task is to focus on precisely what each individual client wants to achieve. “When we’ve identified their goals, we can recommend an appropriate strategy, which invariably includes an emphasis on diversification.”
Clients’ priorities can differ widely, for example their requirements for liquidity, lifestyle support, philanthropy, succession planning or legacies, in addition to their specific risk constraints and returns expectations.
Leung, who is a CFA charterholder with 20-years’ experience in the financial industry, also incorporates ESG in the fund selection process, and due diligence includes DEI, because, she said, investment usually benefits from a variety of views and diversity of background. In addition to an MBA, Leung has Master of Studies degree from the Cambridge Institute of Sustainability Leadership at the University of Cambridge.
Rate cuts will boost bonds
In the short term, Leung notes that inflation is declining, growth is slowing moderately and the employment rate is normalising, so interest rates should come down later in the year. However, “the bond markets are pricing the extent and speed of interest rate cuts very differently from at the start of the year; now cuts are likely to happen in the second half of the year and JPMPB expects four-to-five cuts of 25 basis points each,” she said.
“The US treasury yield curve is quite flat, so we advise a barbell strategy; short duration can still provide high income and long duration bonds will generate capital returns as interest rates fall,” added.
Leung also sees opportunities in credit, especially European credit where spreads (over government bond yields) are wider than in the US and yields can be further enhanced on a hedged basis. Some investors have also migrated to high-yield credit, where sparse primary market activity has meant that the few new issues raised have typically been somewhat oversubscribed.
Tech has further to run
In stock markets, Leung notes that despite the tech rally over the past few months several stock prices are flat compared with three years ago. JPMPB expects earnings growth in the sector of about 20% in 2024, which translates to PEG of 1.3 times, so in that context the sector is still relatively cheap.
The sector’s value is reinforced by the rapid developments in AI, as companies such as Microsoft expand their capex on infrastructure to install AI chips.
“The “magnificent seven” have also improved their operational efficiency, retain high cash balances and have bolstered their free cash flow,” said Leung. “Meanwhile, AI adoption will benefit other sectors, notably healthcare, which have lagged more obvious tech stocks.”
Elsewhere in the US market, “mid-cap stocks have attractive valuations, with earnings growth having reached a nadir. They have underperformed large-caps, and bargains can be found among this under-researched sector,” according to Leung.
Value in Asia markets
Among other markets, India is appealing on a multi-year structural basis: young demographics and recent reforms are especially supportive to economic growth and business prosperity.
“Although, we’re mindful of current high valuations, GDP growth in India is translating into corporate earnings growth of 12%, yet annual equity returns are only 10.6% during the past two decades,” said Leung.
“Volatility is expected during the current elections, but historically the equity market performs well once the elections are finished. Besides, many investors in the region tend to be underweight in India.”
Meanwhile, many clients have been asking Leung about Japan and she has advised them to close any underweight positions.
“The economy is reflating which should boost corporate earnings, while concurrently corporate governance is improving, so there are compelling reasons to revisit Japanese stocks,” she said.
“However, we’re concerned about future currency strength, which would have a negative effect on exporters. Hence, we are focusing on value stocks,” she added.
China remains a wait-and-see call and Leung is advising clients to closely monitor for sustained stimulus and support measures by the China authorities.
Nevertheless, valuations are cheap in China, where corporate earnings are growing at 9-10%.
“We prefer stocks quoted in mainland China to those listed offshore because fund flows are more positive onshore. Our favoured sectors are domestically oriented too, such as being selective in consumer discretionary and staples,” Leung said.
Exclusive strategy
Another area of focus is on a strategy that JPMPB has exclusively collaborated with an asset manager that allows investors to gain exposure to global equities without any style bias.
This strategy, which is only for JPMPB clients, has led to outperformances in a more challenging and unpredictable environment over the past three years – years where outperformance pivoted between growth-oriented (2020) and value-oriented (2021) strategies, according to Leung.
“Given the unprecedented and challenging environment, not only is diversification key but it is equally important to find managers who can deliver alpha in an everchanging environment,” she said.
