“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
