On balance, it seems to make sense to stay exposed to the stock market via stocks that tend to exhibit more defensive properties. By style, this might suggest a shift towards value rather than growth and a focus on larger cap rather than small cap stocks. Screening on quality is particularly important to be sure a portfolio doesn’t contain the companies that have overleveraged in this expansion.
It would still be wise to consider assets that will work to cushion a portfolio should the assumption that politicians will eventually act rationally not prove correct. In short, we should look for assets that will work in tail risk scenarios – those with small probability, but high impact.
US Treasuries have rallied a long way but have scope to rise further should it be clear that the US is facing a more significant downturn. Other options include traditional safe-haven currencies such as the Japanese yen or Swiss franc, as well as gold.
Macro hedge fund relative performance & volatility
Index level (LHS); % change year on year (RHS)
Source: CBOE, Hedge Fund Research Indices (HFRI), Refinitiv, J.P. Morgan Asset Management. Macro hedge fund relative performance is calculated relative to the HFRI fund weighted hedge fund index. VIX is the implied volatility of S&P 500 Index based on options pricing. Past performance is not a reliable indicator of current and future results. Data as of 31 May 2019.
There may also be options in the alternative markets. Macro funds tend to be the most nimble in a politically charged environment and can shift assets globally and by asset class, and use derivatives to insulate portfolios in periods of high volatility.
Real estate and infrastructure tend to have low correlations with public markets and, in return for a lack of liquidity, offer a higher yield.
Moreover, should the next downturn result in more experimental monetary policy – a new chapter in the “printing money” saga – markets are likely to fret, at least initially, about the inflationary consequences (particularly if this is occurring alongside an apparent reversal in globalisation and central bank independence). The added inflation risk may increase the value of these real assets. Similarly, in such a scenario, inflation-linked bonds may command a higher premium.
UK property returns
%, annual returns
Source: MSCI, J.P. Morgan Asset Management. UK property includes retail, office, industrial, residential, and hotel sectors. Past performance is not a reliable indicator of current and future results. Data as of 31 May 2019.