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  4. Outlook 2021: portfolio positioning with ‘G.P.S.’

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Outlook 2021: portfolio positioning with ‘G.P.S.’

Dec 2020 (3-minute read)

J.P. Morgan Asset Management

Key takeaways:

  • As the world’s economy gradually recovers, uncertainties remain. Keeping track of Growth, Policies and Sector performance could help lead to a good start to a 2021 investment journey.

  • On equities, long-term structural trends such as technological development and healthcare innovation could continue to bode well for Asian equities1.

  • On fixed income, emerging-market debt (EMD) and corporate debt could be relatively attractive. Meanwhile, securitised debt, as part of an overall portfolio, could also play a role in diversification in the current low rate environment.

The global economy went through an unusual recession in 2020, one that was sharp and short. In the first half of 2020, the economy bottomed but also regained most of the losses.

Looking forward, the economy will likely continue to recover through 2021, but the pace of recovery in each location will likely be dependent on how the economies tackle the global public health crisis. While uncertainties persist, investors could keep track of growth, policies and sector performance as they embark on their investment journey.

Growth: Asia’s long-term growth trends continue

The use of vaccines has been relatively uncommon among China’s population, mainly because of little awareness about public healthcare and limited vaccine supply. Nonetheless, the current crisis has sparked near-term demand, and this could help increase market penetration of various healthcare-related services and products over the long run.

Meanwhile, mobility restrictions are changing daily life as more people are staying home longer. The digital wave has reached the shores of various Asian markets. Already, there are a number of promising eCommerce or payment unicorns in Southeast Asia and India, and we believe that in time, these companies could go public and further diversify Asia’s equity markets.

Policies: accommodating policy that supports risk assets

As demand-side inflation is unlikely to pick up drastically in developed economies, major central banks could likely maintain accommodative monetary policy.

Amid low rates, we believe this would create a constructive backdrop for risk assets such as equities and corporate bonds. And Asia is among one of the preferred avenues for growth opportunities as demographic changes and urbanisation are driving the region’s long-term structural growth development.

Sector performance: diversifying across equities and bonds

1. Opportunities in new economy sectors within Asian equities1

While equity markets have made impressive gains since the trough in March 2020, this recovery has been uneven. At the end of October, markets in the Association of Southeast Asian Nations (ASEAN), Europe and Japan were still down relative to the start of 2020.

Within Asia, the market is overall driven by new economy sectors such as technology and healthcare. As Asian economies gradually relax mobility restrictions, this is likely to help expedite trade recovery, bolstering corporate performance and Asia’s stock markets.

Earnings growth by sector across Asia2

2. Source: FactSet, MSCI, J.P. Morgan Asset Management. Sector indices used are from the MSCI AC Asia Pacific ex-Japan Index. Consensus estimates used are calendar year estimates from FactSet. Past performance is not a reliable indicator of current and future results. Data reflect most recently available as of 31.10.2020. Forecasts/estimates are indicative and may or may not come to pass.

      JPMorgan Asia Growth       
Fund

JPMorgan China A-Share Opportunities Fund

JPMorgan China Pioneer A-Share Fund

2. EMD stands out amid a weak US dollar1


The search for yield continues to attract international capital into Asian fixed income, considering the interest rate differential between developed market fixed income and their Asian counterparts. In particular, the onshore China bond market is opening up to international investors, and this broadens active investing opportunities in Chinese corporate and government bonds.


3. Securitised debt’s role in diversification1

In 2020, US Treasuries (UST) played a less significant role in helping investors manage market volatility. Not only have yields fallen below 1%, and therefore do not generate income for investors, but their traditional negative correlation against equities also weakened considerably.

Other than traditional fixed income sectors, securitised debt such as asset-backed securities and mortgage-backed securities can be a part of the overall portfolio. They generally have lower correlations with equities but provide slightly better yields than UST. Based on investors’ investment objectives and risk appetite, those with long-term investment horizons could also consider alternative assets such as real estate, infrastructure and transportation assets, which could present relatively attractive income opportunities with low correlation to global equities.


Yields and correlations of fixed income returns to equities3

3. Source: Barclays, Bloomberg Finance L.P., FactSet, ICE BofA Merrill Lynch, J.P. Morgan Economics Research, MSCI, J.P. Morgan Asset Management. Based on Bloomberg Barclays US Treasury (UST) Bellwether 2y & 10y (2y & 10y UST), Bloomberg Barclays Treasury Inflation-Protected Securities (TIPS), ICE BofAML Country Government (1-10y) (France, Germany, Japan & UK (1-10y)), Bloomberg Barclays US Aggregate, Credit – Investment Grade & High Yield (US Aggregate, IG & HY), Bloomberg Barclays US Floating Rate (US Floating Rate), Bloomberg Barclays US Aggregate Securitised – Mortgage-Backed Securities (US MBS), Bloomberg Barclays Pan-European High Yield (Europe HY), J.P. Morgan GBI-EM Global (Local EMD), J.P. Morgan EMBI Global (USD EMD), J.P. Morgan Asia Credit (JACI) (USD Asia Credit), J.P. Morgan Asia Credit (JACI) – High Yield (USD Asia HY), J.P. Morgan Asia Credit China Index (USD China offshore credit), J.P. Morgan CEMBI (USD EMD corporates), J.P. Morgan Asia Diversified (JADE) (Local Asia). *Correlations are based on 10-years of monthly returns. Data reflect most recently available as of 31.10.2020. Yield is not guaranteed. Positive yield does not imply positive return.

                JPMorgan Funds -              
Income Fund

JPMorgan Asian Total Return Bond
Fund

  JPMorgan Funds - China Bond  
Opportunities Fund


Conclusion

As 2021 approaches, the global economy is likely to continue its recovery, but the pace of each location would depend on how the global public health crisis unfolds. As recoveries are likely to be uneven, investors, based on their investment objectives and risk appetite, could keep track of growth momentum, policy development and sector performance, and allocate assets flexibly as they seek investment opportunities in a ‘new normal’.

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Provided for information only based on market conditions as of date of publication, not to be construed as investment recommendation or advice.

Diversification does not guarantee investment return and does not eliminate the risk of loss. Indices do not include fees or operating expenses and are not available for actual investment. Forecasts, projections and other forward looking statements are based upon current beliefs and expectations. They are for illustrative purposes only and serve as an indication of what may occur. Given the inherent uncertainties and risks associated with forecast, projections or other forward statements, actual events, results or performance may differ materially from those reflected or contemplated. 

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.

Investment involves risk. Not all investments are suitable for all investors. Past performance is not a reliable indicator of current or 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.

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