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.

42 UK equities performance and drivers

65 Government bonds

Flexible fixed income

  • Central bank policies and negative net supply have driven government bond yields to very low – and even negative – levels. This environment is particularly difficult for income-seekers looking to protect capital.
  • This makes it challenging for investors – especially those more adverse to risk, such as older people – to generate a secure investment income, while also leaving them vulnerable to the threat of rising yields.
  • Now more than ever, investors will need to look beyond traditional “safe” fixed income sectors and adopt a more flexible approach to bond investing to address these concerns.

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. The market cares more about the change in unemployment than the level of unemployment, so unemployment continuing to fall could well support both the economy and markets.
  • Retail sales and industrial production data are also recovering, showing that the recovery is broad based.
  • Business sentiment surveys are suggesting that growth should remain healthy.

17 Eurozone growth monitor

21 US growth monitor

Investing in the US

  • This recovery could last longer than average because the last recession was so severe, meaning it is taking longer for economic excesses to build up.
  • A fall in corporate profits often leads to companies cutting back on employment and investment, triggering a recession. This situation had been a risk in 2016 but corporate profits are now recovering again, helped by a recovery in the price of oil, and this is reducing the risk of a recession.
  • The labour market remains very healthy and consumer confidence is high.
  • The Conference Board’s leading indicator is not suggesting an imminent recession either.

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.

74 Risk-adjusted returns and downside protection