Investors are facing a relatively eventful 2020, with an evolving coronavirus situation, post-Brexit and a US presidential election set to take center stage in November. Against this backdrop, what could fund managers do to filter out market noise and set actionable insights to stay invested?

Leon Goldfeld, a portfolio manager of our Multi-Asset Solutions (MAS) team, relates why uncertainties do not necessarily bring volatility, and gives an update of our multi-asset strategy.
 

As coronavirus dominates headlines, what are the market implications?

• The current coronavirus situation is a short-term “air pocket” to the overall growth momentum. The resulting disruption to commerce, travel, and other forms of activity will likely produce a temporary but significant gross domestic product (GDP) slump in the affected countries in the first quarter (1Q) of 2020.
• If the situation is brought under control in the next few months, we’ll likely see the economy starting to bounce back in 2Q and 3Q 2020. Read more: What are the investment implications from the coronavirus outbreak?
   

Is the current global growth recovery sustainable?

• Prior to the coronavirus outbreak, the global economy had shown an improvement in growth momentum. While the recovery will be delayed, we do expect the positive trend in growth to resume from Q2. For the whole of 2020, we believe that growth will be stronger than in 2019, and in the second half of this year, growth is likely to be above long-term average level. 
   

Emergence of inflation risk?

• The main economic risk to the positive growth outlook is centered on rising inflation. At this stage, inflation remains benign. However, it is a risk that needs to be watched as it could lead to a change of the favourable monetary policy stance of central banks around the world.
  
   

• Uncertainties do not necessarily bring volatility. For example, our tracking tools show that prior to the global financial crisis (GFC), there was a high correlation between general political uncertainty and equity market volatility as measured by the Volatility Index (VIX). Since the GFC however, that correlation has stopped working. The relationship between market volatility and political uncertainty since the election of Donald Trump has been even more interesting – policy uncertainty has never been higher, but market volatility has flat lined. So there’s a complete disconnect between what general investors may perceive as risk and what the market is reacting to. We think there are a few reasons for this decoupling.

• Managing volatility
  So how do we manage volatility? The benefit of being a multi-asset investor is having diversification² of asset classes, including those with low to negative correlation. The correlation between US Treasury yields and the global stock markets is negative - almost at record negative correlation. While negative yields in places like Japan and Europe have a weaker correlation to equities, we do still see duration as an important way of managing downside risk in equities, so that’s a key hedging tool. Diversification² works. Read more: The secret to effective diversification
  
  
  
• Flexible asset allocation
  We’re prepared to make rapid asset allocation changes as managing risk is important. Last year, our strategy had a lower absolute volatility when the chances of recession were higher. We are constantly adjusting beta risk and we control that through changing physical assets as well as using futures to quickly adjust risk positions. 
  
   

From high yield³ to multi-asset income^1,4

• The big theme in retail markets across Asia has been income. Last year, we saw a strong preference for fixed income around the region, particularly high-yield³ products. One of the trends we expect in 2020 is for that to rebalance a little. 
  
  
• Fixed income will remain a critical base. But at the margin, we’re seeing the search for income spreading out, both in terms of demand for multi-asset income and a drive towards more growth assets. Investors understand that income alone will not be enough, it has to be combined with asset market growth in order to obtain an attractive level of total return.
  
  
• The ‘very conservative’ approach taken in 2019 by some investors is starting to ebb, so they are shifting up the risk curve, leading to higher demand for multi-asset products. Read more: The A.B.C. of multi-asset income investing
  
   

Global growth bottoming out

• Our MAS team thinks we’re in an environment of improving global growth. Whilst markets have rallied over 2019, we do not believe the positive macro outlook is fully priced. We expect a sustained period of economic growth over the balance of 2020 and into 2021 will bring with it higher equity market returns. 

Across the board, our biggest structural tilts are towards equities and credit globally over government bonds¹. 

Tilt to equities¹

• Within equities, our preferences are barbelled between US equities, where we are most confident in high-quality, stable, high-margin corporate growth and emerging market (EM) equities, which are relatively cheaper than other cyclical markets and haven’t performed as well in 2019, so we expect some catch up there. We are neutral on Japan and European equities. Read more: Make equities a partner in your multi-asset journey

Selective on bonds¹

• We have substantially reduced our government bond exposure and we are underweight duration overall. We’re selectively positive on EM corporate debt, particularly USD-denominated bonds and we’re more neutral on high yield³, where the level of pricing on spreads is slightly low. Read more: 1Q 2020: where we see opportunities

Conclusion

Uncertainties are here to stay so it is important to filter out market noise and stay invested. A multi-asset income strategy that invests in asset classes with low to negative correlation could help build a diversified² portfolio with potential for relatively attractive income opportunities and a balanced risk profile.

1. 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.
2. Diversification does not guarantee investment return and does not eliminate the risk of loss.
3. High-yield credit refers to corporate bonds which are given ratings below investment grade and are deemed to have a higher risk of default. For illustrative purposes only, exact allocation of portfolio depends on each individual’s circumstances and market conditions. Yield is not guaranteed. Positive yield does not imply positive return.
4. Yield is not guaranteed. Positive yield does not imply positive return.

Investment involves risk. Not all investments are suitable for all investors. Past performance is not a reliable indicator of current and future results. Please refer to the offering document(s) for details, including the risk factors. Investors should consult professional advice before investing. Investments are not similar to or comparable with fixed deposits. 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.