Hui Tai, JP Morgan Asset Management
Concerns about the US going into a recession stem from one of the longest economic cycles in US history and rising interest rates, Hui said at a media briefing in Hong Kong last week.
Hui’s role is sharing macro views and providing allocation advice to JPMAM’s clients, which include wealth managers, retail and private banks and institutional investors.
He explained that investors should monitor regularly the state of the US economy as it largely affects global markets. For example, emerging market equities have moved in the same direction as US equities 80% of the time in the past 300 months, Hui said.
“If the US is not performing well, it is hard for the rest of the world to perform well.”
However, Hui does not expect a recession in the short- to medium-term.
“Interest rates at this point are not too high to trigger a recession. Maybe there will be a moderation of growth.”
Compared to the environment in 2008, company debt on average is not as huge and profit-to-debt ratios are now healthier because companies have raised cash holdings, he said.
Companies still have debt, particularly because of easy credit the last several years. However, Hui believes they are in a much stronger position today to meet debt obligations.
He did not have a completely positive outlook. Investors should prepare now for the possibility of an economic downturn, he said. “As the economic cycle continues, we need to start to become more aware of the options or strategies available when the downturn happens.”
Buy boring equities
Hui recommends that investors adopt a more defensive position.
In equities, he advises taking more exposure to “utilities, telecom, consumer staples — the so-called boring stuff that provides dividends”.
Hui explained that although investors in these types of stocks would likely be profiting less from capital gains, they would still be receiving around 3%-5% in dividend yields from these defensive sectors. This is particularly appealing for Asian investors, who are dependent on income-producing investments, he added.
At the moment, Asia equities continue to be Hui’s favourite asset class, the same as last year.
However, he is cautious on the US technology sector. “Investors have taken a very optimistic view but the good thing is a lot of these companies do have revenue and profit to back up valuations. But the valuations we are seeing now might need to adjust [downward] a little bit.”
On the flipside, he is optimistic on Chinese technology companies and is less worried about valuations. “The biggest guys have multiples streams of businesses, such as logistics, financials and gaming,” he said, adding that these companies also have a pipeline of business ideas for the next three-to-five years.
“That potentially could sustain their very strong revenue growth in the medium term.”
Turning to fixed income, he said allocations should be adjusted upward due to the expectations of increased market volatility.
Within fixed income, investors should be more selective in corporate credit. In particular, exercise caution in the high yield market. “You will see credit spreads widen, especially in the high yield market.”
He also recommends bonds that have low duration. “During a downturn, you typically see the long-end of the yield curve coming down more.”
Alternatives, such as infrastructure and private equity, are also part of the defensive strategy because they tend to have lower correlation to public markets, he said.