It’s about income and quality for 3Q 2019
Target quality, income-generating assets to stay agile and resilient in 3Q 2019.
Global equities struggled during May, with almost all the major markets delivering negative returns as trade tensions escalated between the US and China. The MSCI World Index delivered a negative return of 6.1% in May4.
But not everything else did
Global fixed income markets were broadly positive during May. US Treasuries and European bonds rallied as risk-off sentiment spiked amid heightened trade tensions and concerns over the slowing global economy.
Various asset classes react differently to market changes. As shown in the chart below, some asset classes have negative correlation to the MSCI World Index (i.e. moving in an opposite direction to stocks). Some move in the same direction (have a positive correlation) but at different extents.
Correlation between asset classes5
↓ Continue reading below for investment implications
The choppy markets in May 2019 once again prompted investors the option to go across asset classes, sectors and regions as volatility will likely persist. Investing dynamically in multiple types of asset classes could help diversify1 portfolio risk.
Three elements to consider:
A conservative allocation in global equities
Based on current market conditions, our multi-asset solutions team’s preference is for the US, which could provide higher quality earnings, compared with Europe, where the regional economy has continued to struggle.
Invest dynamically across fixed income
High-yield corporate bonds remain our multi-asset solutions team’s preferred asset class for risk exposure as US growth is likely to support credit which could potentially provide attractive income6.
With the economy moving deeper into a late cycle, credit quality enhancement is becoming more important. And one way to do that is to go beyond traditional fixed income sectors to non-traditional sectors such as securitised debt3.
Non-agency mortgage-backed securities (MBS)3, issued by private financial institutions, tend to be less correlated to traditional fixed income sectors so they could help diversify1 portfolio risk while allowing a wider source of income which is less likely to be impacted by a single risk factor.
Consider non-traditional income sources
Income6 can be sourced from stocks and bonds, as well as non-traditional sources such as REITs and preferred equities3.
In general, REITs could be deemed an alternative income source as they offered equity-like returns to a portfolio but higher potential yield than US equities and investment-grade bonds.
With US interest rates likely to stay accommodative this year, this is expected to benefit income-producing securities issued by property companies, such as REITs.
As global growth slows and market uncertainties persist over heightened trade tensions, adopting a conservative multi-asset approach3 could be an option to help add resilience to your investment portfolio. It’s a strategy that could balance returns and volatility of different asset classes, and adopt a global allocation aimed at capturing different sources of income across sectors and regions.
1. Diversification does not guarantee investment return and does not eliminate the risk of loss.
2. Source: Bloomberg Finance L.P., Dow Jones, FactSet, J.P. Morgan Economic Research, MSCI, J.P. Morgan Asset Management. Data reflect most recently available as of 31.05.2019. 2019 year-to-date returns of Global Corporate High Yield Bonds (represented by the Bloomberg Barclays Global Corporate High Yield Index), Emerging Market Debt (represented by J.P. Morgan Emerging Markets Bond Index Global), Developed Market Equities (represented by the MSCI World Index), Emerging Market ex-Asia Equities (represented by the MSCI EM Latin America and MSCI EM EMEA Indices) and Asia Pacific ex-Japan Equities (represented by the MSCI AC Asia Pacific ex-Japan Index) were 6.4%, 7.3%, 10.1%, 7.5% and 5.6%, respectively. All data represent total return in US dollar terms for the stated period.
3. For illustrative purposes only based on current market conditions, subject to change from time to time. Not all investments are suitable for all investors. Exact allocation of portfolio depends on each individual’s circumstance and market conditions.
4. Source: Bloomberg Finance L.P. Data of MSCI World Index for May 2019.
5. Source: Barclays, Bloomberg Finance L.P., FactSet, MSCI, J.P. Morgan Asset Management. **10-year correlation of monthly total returns against the MSCI World Index. Correlations based on MSCI AC Asia ex-Japan Index (MSCI Asia ex-Japan), MSCI Emerging Market Index (MSCI EM), Bloomberg Barclays Global Aggregate Government Treasuries (Global government bonds), J.P. Morgan Asia Credit Index (JACI) (Asian USD Bond), J.P. Morgan Emerging Market Bond Index Global (EMBIG) (USD EMD), J.P. Morgan Corporate Emerging Market Bond Index (CEMBI) (EM Corp), Bloomberg Barclays Pan European High Yield Index (European High Yield), Bloomberg Barclays U.S. Corporate High Yield Index (U.S. High Yield), Bloomberg Barclays U.S. Capital Aggregate (U.S. Agg), U.S. Dollar DXY Index (U.S. Dollar (DXY)), Brent Crude Oil Price (USD/bbl) (Brent Crude Oil), London Gold PM Price Fixing (USD/oz) (Gold) and FTSE EPRA/NAREIT Developed REITs Index (REITs). Past performance is not a reliable indicator of current and future results. Data reflect most recently available as of 31.03.2019.
6. Yield is not guaranteed. Positive yield does not imply positive return.
Investment involves risk. Investors should consult professional advice before investing. The opinions and views expressed here are as of the date of this publication, which are subject to change and are not to be taken as or construed as investment advice. Estimates, assumptions and projections are provided for information only and may or may not come to pass. This document has not been reviewed by the SFC. Issued by JPMorgan Funds (Asia) Limited.