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?
Modest long-term growth
Growth remains low by historical standards, according to J.P. Morgan Asset Management’s 2020 long-term assumptions.
Over the next 10 to 15 years, we see global growth averaging 2.3%, down 20 basis points (bps) from our 2019 assumptions. Our forecast for developed markets remained unchanged at 1.5%, but for emerging markets, we trimmed our forecast 35bps to 3.9%.
Our 10- to 15-year projections for global growth4
In our view, population aging is a key headwind to global growth while a technology-driven boost to productivity may help growth. In addition, inflation is set to fall short of most central bank targets, unless and until fiscal stimulus features more prominently in the policy toolkit.
An asset is generally considered as having relatively lower risk when it could exhibit lower or negative correlation to the general market and could help balance the risk profile of portfolios during times of stress.
Quality government bonds have been traditionally considered a type of lower risk assets in long-term portfolios with multiple assets.
Investors generally sacrifice potentially higher expected returns from risk assets in return for a more balanced risk profile. But this is changing as years of monetary easing and low inflation have left yields at ultra-low, or even negative levels.
Ultra-low or negative yields
Now, some developed market government bonds yield1 zero or less. This could mean investors may have to pay for the relatively lower risks that these bonds could potentially offer.
Diversifying2 across different types of assets, even among relatively lower risk assets, could help add resilience to portfolios over the long run. Other lower risk assets could include currencies like the US dollar, Japanese yen and Swiss franc, and alternative assets such as core real estate and infrastructure, depending on investors’ objectives and risk appetite.
Broader asset mix
Fixed income still plays a significant role in portfolios. Even in a low rate environment, opportunities for yield1 could still be found within the same asset class, but this could require moving along the risk spectrum. Depending on investors’ objectives and risk appetite, credit could potentially be considered as investors seek to enhance portfolio returns for the long term.
Equities could continue to play a major role in long-term portfolios with modestly improved valuations in both developed and emerging markets. The return of capital to shareholders in the form of dividends and buybacks continues to be a crucial component.
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Generally, no single asset class can stand out as an all-time outperformer. As winners rotate, it is crucial to have a diversified2 portfolio so that you won’t miss out on the opportunities to capture the upside potential of different asset classes. Keeping a view over the full cycle is always important, but disciplined execution of an investment strategy is also a clear competitive advantage.