As the world grapples with the fallout of a global public health crisis, the significant re-pricing of assets across markets has been unprecedented. With investors and policymakers treading uncharted territory, the economic backdrop that will characterise the next phase of a business cycle is being forged amid the current market volatility.

With the global economy sinking into recession, how will that impact investors in their search for income? Our Multi-Asset Solutions Team shares their views on why a multi-asset income strategy² remains essential in this environment.
 

Q1：HOW HAVE YOU BEEN POSITIONING YOUR MULTI-ASSET INCOME STRATEGY IN RECENT MONTHS³? 
 

• In late 2019, the global outlook had looked brighter - a US-China trade agreement, insurance cuts from the Federal Reserve and a tentative turn in the macro data spurred a year-end rally in risk assets.
• Nonetheless, we entered 2020 with a more conservative risk exposure with reduced equity allocation as we are mindful of the potential headwinds that could emerge.
• Now, we are grappling with the economic toll of a fast-spreading respiratory disease and the likelihood of a severe global recession for 2020. Against this backdrop, we have further strengthened portfolio resilience in the first quarter, whereby we:
  
  • extended US duration of the portfolio by adding to long positions in 10-year and 30-year US Treasuries.
  • added liquidity so that we would not become a forced seller in the market. The price action in March had the hallmarks of a liquidity crisis where the scramble for cash resulted in days where bonds, gold and other assets that are generally viewed as safer were sold indiscriminately, alongside riskier assets.
     

Q2：HOW ARE YOU MANAGING THE EXPOSURE TO HIGH-YIELD (HY) CREDIT^3,4? 
 

• We have been shifting up in quality for credit exposure since 2019. As of end-March 2020, more than 80% of our HY allocations were rated B- or above. 
• High-quality HY has outperformed year-to-date.

Source: J.P. Morgan Asset Management, Bloomberg. ‘BB’ is Barclays US High Yield 2% Issuer Cap Ba (I20599US), ‘B’ is Barclays US High Yield 2% Issuer Cap B (I20600US), ‘CCC’ is Barclays US High Yield 2% Issuer Cap Caa (I20601US). Issuer weighted default rate on US HY allocation. Data as of end-March 2020. Past performance is not a reliable indicator of current and future results. Provided for information only, not to be construed as investment advice.

Q3：HOW ARE YOU MANAGING CURRENT VOLATILE MARKETS³? 

Q4：WHAT ARE THE SIGNALS TO ADD BACK RISK? 
  

• Equities tend to bottom before economic data improves, but we are still on a lookout for one or more of the following signals:
  
  
  • A sustainable improvement in the infection rate
    • A flattening of the infection curve could help reduce downside risk but the upside in equities would be limited in the absence of a sustainable solution for the pandemic. The key is a breakthrough in terms of medical treatment and a vaccine.
  • Sizeable policy stimulus
    • Initial fiscal and monetary actions by authorities have been significant, proactive and appropriate. Further actions will be required to support economies though that could be difficult. We need to get conviction that authorities will continue to follow through with additional measures.
  • Valuations becoming undervalued
    • Just looking at market valuations, a recession has already been priced-in, with a decline of about 20% in developed market equities⁵. However, as we expect a severe recession, valuations are not at trough levels.
    • The signal from the price-to-earnings (P/E) ratio is cloudy as many historic equity bottoms have seen lower P/E ratios.
  • A turn in the data
    • Investors will need to determine how quickly the global economy can recover and whether the recovery will prove sustainable after an initial bounce.
       

Q5：WHY INVESTORS COULD CONSIDER A MULTI-ASSET INCOME STRATEGY³? 
 

• The search for quality income becomes challenging with aggressive monetary easing globally.
• Yields on core government bonds may fall further. While they could offer defensive ballast for portfolios, their role in income generation is minimal.
• Broaden income potential through multiple income sources. A diversified multi-asset income solution could be considered a core part of an investment portfolio.
  • While diversification could be challenging amid panic selling and a liquidity squeeze, it is expected to function when markets eventually return to fundamentals.

Conclusion

As the pandemic stretches on, the search for quality income remains challenging with the unconventional stimulus measures undertaken by central banks and governments around the world. Against this backdrop, a diversified multi-asset income solution could continue to help broaden income potential.

This represents investment team’s views as of 15 April 2020 based on current market conditions, subject to change from time to time. Provided for information only, not to be construed as investment or research recommendation.

Diversification does not guarantee investment return and does not eliminate the risk of loss.

1. We seek to achieve the investment objective, there is no guarantee these will be met.
2. 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.
3. Holdings, exposures and allocations for actively managed portfolios are subject to change from time to time. These represents MAS investment team’s views under current market conditions, subject to change from time to time. Provided for information only, not to be construed as investment advice. Diversification does not guarantee investment return and does not eliminate the risk of loss.
4. 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.
5. Developed market equities are represented by the MSCI World Index and Asia pacific ex-Japan equities are represented by the MSCI AC Asia Pacific ex-Japan. 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 31.03.2020.

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.