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Time to prepare for end of economic cycle

But dovish central banks are supporting risk assets and there are still opportunities for tactical investment, according to JP Morgan Asset Management's (JPMAM) chief Asia market strategist.

“Although investors can stay airborne for a while longer, they should prepare for landing,” JPMAM’s Tai Hui said at a recent media event in Hong Kong.

A newly accommodative US Federal Reserve and stimulus measures by China in particular drove equity markets higher during the first two months of the year. Despite the sell-off in late March, the rally should resume — as long economic indicators respond to monetary easing by central banks and the Sino-US trade dispute is contained, he argued.

A weaker dollar should benefit emerging markets as perceptions about corporate refinancing problems become more sanguine, while positive carry should support Asia currencies.

“We remain risk-on for emerging market and high yield corporate bonds, and still favour equity markets in the US and Asia, including China, where low valuations attracted foreign inflows at the beginning of the year and should continue to appeal to overseas investors as the markets further internationalise,” he said.

However, Hui’s optimism is contingent on central banks’ ability to prolong the economic cycle. At some point, “the hang glider kept aloft by policy measures eventually must come down to earth”, he cautioned.

To prepare for an inevitable economic landing, investors should consider putting defensive positions in place. Hui recommended US and German government bonds.

“The biggest red flag would be a surge in US inflation. It would put downward pressure on corporate earnings and could force the Federal Reserve to hike interest rates,” he said.


Hui and his team provided hypothetical portfolio examples (below) for the 16-year period from 31 December 2002 to 31 December 2018.

Historical average monthly returns for the portfolios over the period are: conservative (4%), balanced (6%), aggressive (7%) and high-yielding (6.5%).

Hypothetical Portfolio Allocation

 

Asset class

Conservative

Balanced

Aggressive

DM equities

10%

30%

20%

EM equities

5%

10%

40%

US HY bonds

10%

15%

10%

US IG bonds

25%

10%

5%

EM bonds

10%

15%

5%

Reits

5%

10%

20%

Cash

35%

10%

0%

 

Asset class

High yielding

DM high div equities

20%

EM high div equities

10%

APxJ high div equities

10%

US HY bonds

15%

EM bonds

15%

Asian bonds

15%

Reits

5%

Source: JP Morgan Asset Management

 

 

 

 

 

 

Part of the Bonhill Group.