Growth in focus: finding the ace among A-Shares
Amid China’s long-term structural growth trends, which are the sectors that could stand out in the A-Share market?
It has been a bumpy ride for equity investors as market volatility intensified with geopolitical uncertainties and escalating trade tensions. Yet, there could still be three reasons why we believe investors like us would choose to selectively include equities in a multi-income portfolio.
While market swings could be unsettling for some investors, equities1 are generally considered one of the key asset classes that could offer opportunities to generate capital gain and income.
The MSCI World Index2, for example, reported negative monthly total returns in four of the past 12 months. Yet, the Index has climbed cumulatively, about 10% in the past year, and 40% over the past three years as of 30 September 2019.
Percentage change in monthly returns of the MSCI World Index2
Over the years, no single asset class can stand out as an all-time outperformer. Equities, for example, are among the top three performing asset classes this year so far but weren’t so in 2018.
As winners rotate, it is crucial to have a diversified3 portfolio so that you won’t miss out on the opportunities to capture the upside potential of different asset classes.
Returns of the top three performing assets in past five years4
There are different types of equities across regions and industry sectors. Based on their investment objectives and risk appetite, investors seeking capital growth opportunities may consider investing in fast-growing markets or sectors. On the other hand, those seeking income opportunities may consider high-dividend paying equities. Still, within a specific equity sector, stock selection backed by rigorous research is key.
Returns of global and Asia equity indices*
In the search for income and returns, our MAS team adjusts the Fund’s allocation dynamically as we navigate different market conditions. The Fund’s allocation to equities and real estate investment trusts (REITs) has varied over the years, from a low of around one-fifth of the portfolio in 20085 to a high of about 50% in 2015.
As global earnings growth slows and risks increase, our MAS team has trimmed allocation to equities and REITs from about 35% in June 2018 to around a quarter in September 20195.
Active management of equity exposure5
Within equities, our MAS team currently views US stocks more favourably. We believe US stocks offer potential for relatively stable and diversified revenue streams, and earnings appear to be less vulnerable to downgrades versus other key regions. Nonetheless, US equities are marginally more expensive on a price-to-earnings and price-to-book perspective. In the table above which shows returns of global and Asia equity indices, US stocks* were the second-best performing equity sector so far this year, and took the top spot over the long term with a 10-year annualised return of 13.2%.
While earnings growth has made a modest positive contribution to returns in the US, it has acted as a drag in other economies such as Europe and emerging markets. The European Central Bank’s stimulus package surprised investors with a re-launch of an open-ended quantitative easing, a cut in policy rates and forward guidance more tightly linked to inflation. In our MAS team’s view, the stimulus alone will likely not be enough to change our structural outlook for low earnings growth for European equities.
We strive to maintain a diversified3 equity exposure so that the underperformance of any single equity market would not impact the overall portfolio significantly.
Market volatility is likely to persist. While short-term market swings could be unsettling for some investors, it's important to keep a long-time horizon when investing in a multi-income portfolio, even for assets such as equities.
The JPMorgan Multi Income Fund1 strives to seek attractive income through diversifying flexibly across geographies and asset classes in different market conditions.