Key takeaways:
Amid the festivities
It is customary in Hong Kong and Singapore to serve ‘pun choi’, or a prosperity pot, when families and friends gather to celebrate the Lunar New Year3. The dish comprises multiple layers of seafood, meats and vegetables, and is slow-cooked over time.
And like a ‘prosperity pot’, investors, depending on their investment objectives and risk appetite, could consider a wider variety of income sources in an investment portfolio1.
Seeking diversification in a portfolio for robust income potential has become increasingly important especially as the Fed is expected to raise interest rates this year4.
Broadening income sources
Symbolising unity and good fortune, the aim of a ‘prosperity pot’ is to tap into a wide variety of quality ingredients in the casserole, such as abalone, which can be sourced from South Africa, dried scallops from Japan or pork belly from Spain, just to name a few options. And the dish can become more flavourful, or sometimes complex, deeper inside the casserole3.
Searching for income could be likened to seeking quality ingredients for this Lunar New Year dish, investors could consider traditional and non-traditional sources within a single asset class, or multiple asset classes across different regions, markets and sectors.
Investing across a broader spectrum of asset classes in the overall portfolio1 could help capture income opportunities and manage risks, as some asset classes could have a relatively lower correlation against the others in changing market conditions, and could generate different returns, as illustrated in the chart below5.
Asset class returns in a high-inflation environment5
5. Source: Barclays, Bloomberg, Dow Jones, FactSet, Federal Reserve, J.P. Morgan, MSCI Global, NCREIF, Strategas/Ibbotson, J.P. Morgan Asset Management. Median inflation was 2.33% in measured period. Rising inflation distinction is relative to the previous quarter. High and rising inflation occurred in 34 of the 120 measured quarters. *Emerging Markets (EM) debt based on the period 4Q 1994 - 3Q 2021. **Cash based on the period 4Q 1992 - 3Q 2021. Based on Shiller S&P 500 Composite total return index (US equities), MSCI Emerging Markets Index (EM equities), Bloomberg Barclays Global Aggregate (Global bonds), Bloomberg Barclays Aggregate US Treasury Index (US govt. bonds), Bloomberg Barclays Aggregate US Corporate Investment Grade Index (US inv. grade), Bloomberg Barclays U.S. Corporate High Yield Index (US high yield), J.P. Morgan EMBI Global (EM debt), NCREIF Property Index (Real estate), S&P GSCI (Commodities) and Bloomberg Barclays U.S. Treasury – Bills (1-3 months) (Cash). Indices do not include fees or operating expenses and are not available for actual investment. Past performance is not a reliable indicator of current and future results. Data reflect most recently available as of 31.12.2021.
Opportunities we see across regions, sectors and asset classes1
| Multi-income strategy | Fixed-income strategy | |
| Key sources of income | Tapping into low or negatively correlated opportunities across asset classes | Going across sectors within a single asset class. Additionally, the global bond market size is currently about US$136 trillion6. |
| Equities | Equity income or dividends from equities among quality corporates in the US, Europe and Asia. | |
| Fixed income | Government bonds. As the movement of interest rates can have significant impact on a fixed income portfolio, we strive to manage these risks by adjusting duration7. For example, we are modestly underweight duration7 to manage the risk of rising yields. Investment-grade credit. As markets continue their vaccination rollouts and business activity further rebounds, companies should have registered a gradual strengthening in corporate balance sheets. Different bonds react differently to market changes. For example, US high-yield (HY) corporate bonds8 tend to perform better in periods of rising rates. Quality HY bonds8 in the US and Europe present compelling income opportunities as corporate earnings are rebounding as the global economy improves and consumption recovers. We believe strong US consumer and housing market fundamentals could bode well for securitsed assets9 such as asset-backed securities and mortgage-backed securities. |
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| Hybrids | Hybrid securities from convertibles and preferred equities, which are generally higher in the capital structure and are supported by strong fundamentals in financials and robust capitalisation of banks. Global real estate investment trusts and infrastructure equity. |
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Being active in an overall portfolio1
Active management, which integrates macro views and the bottom-up, yield-focused insights of asset class specialists, remains key when seeking out quality income opportunities over the long term.
Within fixed income, we have preferred low-duration, high-carry credit such as HY bonds8 where we continue to see support from the fundamental perspective. For multi-asset solutions, we are able to exploit market dislocations, seeking opportunities for sustainable yield in the current market environment by shifting tactically across asset classes and regions.
In a fast-changing market environment, we believe that being diversified and tapping into relatively attractive income opportunities with active management approach will continue to be crucial.
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. Yield is not guaranteed. Positive yield does not imply positive return. The portfolio risk management process includes an effort to monitor and manage risk, but does not imply low risk.
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.
2. Source: “Consumer Price Index: 2021 in review”, U.S. Bureau of Labor Statistics, 14.01.2022.
3. Source: “A quick history of the pun choi”, TimeOut, 12.02.2018.
4. Source: “Federal Reserve issues FOMC statement”, Federal Reserve, 26.01.2022.
6. Source: J.P. Morgan Asset Management, Bank for International Settlements. Global bond market regional breakdown may not sum to 100% due to rounding. Data are as of 24.01.2022.
7. Duration is a measure of the sensitivity of the price (the value of the principal) of a fixed income investment to a change in interest rates and is expressed as number of years.
8. High-yield credit refers to corporate bonds which are given ratings below investment grade and are deemed to have a higher risk of default. Yield is not guaranteed. Positive yield does not imply positive return.
9. Securitisation is the process in which certain type of assets, such as mortgages or other types of loans, are pooled so that they can be repackaged into interest-bearing securities. Examples of securitised debt include asset-backed securities and mortgage-backed securities.
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