4Q 2019 market outlook in 3 charts
Yield can still be found in a low rate, low inflation and low yield environment.
The ongoing US-China trade dispute and concerns over the possibility of a global recession have taken a toll on markets. Hong Kong stocks aren’t immune from the market risk, and lost the year-to-date gains in August1.
Investors are also increasingly concerned that escalating trade tensions could end the US expansionary cycle and prompt a recession. The Chicago Board Options Exchange Volatility Index (VIX), or the so-called “fear index”, fluctuated between the levels of 12 and 14 in July, and soared to almost 25 in early August before retreating earlier this month2. These sharp movements of the VIX reflected market anxieties.
Year-to-date change of the Chicago Board Options Exchange Volatility Index2
To keep the US economy on track and help ease some downside risk, the Fed in July cut its benchmark rate for the first time in a decade, by 25 basis points. This is followed by another 25-basis point cut this week to further ease downside risk. With lower interest rates, Hong Kong bank deposit rates lag inflation, eroding the purchasing power of cash. In the first half of 2019, the average annual real deposit rate of Hong Kong was -2.1%3.
Some investors are currently facing a dilemma - invest in equities and take on higher risk, or stay on the sidelines by holding cash but risk having inflation erode their wealth over time. Against this backdrop, how should investors seek yield while managing risk?
1. Lower volatility: Different asset classes have different risk and return profiles. Diversifying4 your assets could help lower concentration risk. And diversifying your investment across assets with low correlations could help cushion volatility.
2. Portfolio diversification4,5: In the current market environment, adjusting flexibly the bond/equity mix of an investment portfolio is key. As market risk intensifies, dialing up the bond portion of a portfolio could help stabilise performance. Conversely, raising the weighting of equities as the market goes up could help capture potential growth opportunities. Investing globally across markets and sectors also helps harvest more income opportunities.
3. Hone in on income: Focus on income-generating assets and tap multiple income sources. Invest in sectors with the biggest income-generating potential, based on different market conditions, and seek to generate income from other assets when cash returns fall short.
Risk diversification4 and active management are increasingly important as the global investment environment becomes more challenging. Adopting a “three lines of defense” approach in a multi-asset strategy could help harvest relatively attractive income opportunities with lower volatility.
To tackle market volatility and negative cash returns, JPMorgan Multi Balanced Fund seeks to offer investors a multi-facet investment strategy:
As a stock-bond portfolio, the Fund can invest in fixed income securities, especially higher-rating bonds that have relatively lower volatility. In addition, the fund managers could invest in assets that are less correlated or negatively correlated to help lower the overall volatility of the portfolio.
The Fund adopts a more matured approach in its search for income. In addition to tapping traditional investment vehicles such as stocks and sovereign bonds, the Fund can also invest in preferred equity, high-yield bonds, investment-grade bonds, convertible bonds, asset-backed securities, mortgage-backed securities and other non-traditional investment sectors.
The Fund hunts for relatively attractive opportunities globally across over 50 locations and in more than 10 asset classes. By allocating the portfolio holdings dynamically as market conditions evolve, the Fund seeks to capture the best opportunities as they arise.
A strategy that strives for attractive income and lower volatility:
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