Navigating policy uncertainties and high equity valuation

Over the past 2 years, equity markets have been driven by the exceptional performance of a select group of technology companies, resulting in robust returns, particularly in the United States. The rally has prompted concerns about elevated valuations and the ability of the companies to sustain the market momentum.

Adding to this uncertainty are the policies of U.S. President Donald Trump's second administration. Fluctuations in tariffs and political rhetoric along with concerns about a potential rise in inflation that might lead the Federal Reserve to alter its rate cut trajectory, have led investors to adopt a more cautious stance.

While we expect volatility to persist throughout the remainder of 2025, we believe equities should remain a fundamental component of asset allocation. The key is to broaden allocations to encompass a diverse selection of stocks and to adopt a total return approach, which may allow for continued exposure to capital growth potential while capturing income opportunities.  

Focusing on income and staying invested in equities

The JPMorgan Global Equity Premium Income Complex ETF (JEGA) is designed to seek income and long-term capital growth¹. The underlying portfolio consists of two key components:  

1. A relatively defensive, quality global equity portfolio leverages a bottom-up fundamental proprietary research process to identify stocks with attractive risk/return characteristics.
2. An options overlay strategy that aims to generates additional income through selling call options, seeking to deliver a monthly income stream from associated option premiums².

This strategy combines equities with options to strike a balance among yield, capital growth, and risks. Through option writing, it may sacrifice some potential market upside in return for additional income, while avoiding leverage and taking on the duration risks typically associated with bonds.   

Opportunities with Global Equity Premium Income

Opportunities for this strategy given uncertain direction of equity markets could include:

1. Market sell-off: Increased volatility can provide elevated levels of income through option writing. The option premiums collected, combined with the relatively conversative equity income portfolio, may potentially help in managing downside risk.
2.  Choppy, range-bound market: The income obtained in the form of dividends and option premiums may continue to contribute to total return.
3. Market broadens beyond the few sectors and markets: The portfolio may be well-positioned to capture a wider opportunity set as it diversifies across multiple sectors and locations.

Conclusion

Given the expectations of a volatile market, including income in a diversified equity portfolio can add resiliency to overall equity investments and help build a stronger portfolio.  

It is also important to remember that time in the market is more important than timing the market for investors aiming to achieve long-term returns. In our view, investors should think from a total return perspective to manage volatility. This may help maintain a strategic asset allocation in equities.