Portfolio Discussions - J.P. Morgan Asset Management

Portfolio Discussions


Investing in the UK

  • The large-cap FTSE 100 gets most of its revenues from abroad, whereas the mid-cap FTSE 250 has a larger exposure to the domestic UK economy. Therefore, a fall in the pound should favour internationally exposed large-cap stocks, whereas a rise in the pound should favour smaller, more domestically-focused stocks.
  • Mid-cap stocks have strongly outperformed large-cap stocks since the financial crisis but could be more exposed were the UK economy to slow further.
  • The average UK equity fund has far more exposure to mid and small cap stocks than the FTSE All-Share.

Investing in emerging markets

  • Emerging economies have the potential to grow faster than developed economies with economic development and urbanisation starting from a much lower base. Rising urbanisation tends to coincide with rising productivity and hence rising income per capita.
  • Rising incomes help boost local consumption and demand for more goods and services, further supporting stronger economic growth.
  • Emerging markets have contributed the majority of global GDP growth since 2000, and this is likely to remain the case in the coming years.

Investing in Europe

  • Unemployment in Europe is falling, but given it is still high, there is still plenty of room for the jobless rate to fall further. As falling unemployment is both a sign of corporate optimism and supportive of consumer spending, unemployment continuing to fall should support both the economy and markets.
  • Retail sales and industrial production are also recovering, showing that the recovery is broad based.
  • Business sentiment surveys suggest that growth should remain healthy.

Investing in the US

  • US unemployment has fallen to very low levels. Historically, such low levels of unemployment have been a warning sign that we are late in the economic cycle.
  • However, wage growth has tended to accelerate at the end of a cycle, causing a more aggressive monetary policy tightening than we have seen so far this cycle. The recovery could well continue until wages accelerate, causing the Fed to tighten too much.
  • We expect unemployment to keep falling, wage growth to start rising and interest rates to keep rising in 2018, but at a very gradual pace.

Global macro investing

  • Risk-adjusted returns for a traditional balanced equity and bond portfolio have been very strong over the last few years.
  • As we get closer to the end of this economic cycle, returns from traditional assets are likely to fall and volatility is likely to rise, meaning risk-adjusted returns could be lower. In this environment, it probably makes sense to seek exposure to a mix of assets that can provide a lower volatility than equities but that can still deliver attractive positive returns.
  • Investors should not rely solely on a negative correlation between stocks and bonds for diversification as this relationship cannot always be relied on when it is needed most, such as in August 2015.
  • Funds that can use sophisticated strategies, such as options and shorting, have the potential to protect against portfolio downside and can aim to make money without simply relying on equities or bonds rising in value.