Where can investors find alpha and secular growth?
Despite headwinds and uncertainties that persist in the current market environment, we are busier than ever in the Alternative Investments Team at J.P. Morgan Private Bank this year. We see a number of contrarian opportunities through private investments across equity, credit and real estate. Timing is extremely interesting now for medium to longer term investments. We target to capitalize on attractive entry valuation multiple and participate in secular growth areas such as technology, healthcare and even in traditional industrials.
We continue to advocate an diversified approach across strategies and geography. Yet, we are excited to see several opportunities arise due to temporary market dislocation. We can rely on our private investment managers to generate alpha through active management. They depend much less on market direction or beta.
We have three high conviction areas:
1) Interest rates will remain high for the foreseeable future and credit spread have widened, these create cotinuted pressure in corporate financing
- we see a large volume of around 250-300 billion dollars of corporate credit that are maturing in the next 3 years.
- Banks are potentially facing increased regulation and higher capital requirements. They are less active in syndicated bank loan space and also underwrite less high yield bonds
- Weak loan documentation and liquidity pressures in public debt markets create an opportunity for direct lenders to step in on a more senior basis.
- We prefer senior secured first lien private credit managers in the dislocation. These loans can generate 11-13% net internal rate of rate (or IRR) with around SOFR + 750 basis points of coupon. These yield are more than 200 basis points higher than 12 months ago.
- We prefer managers who can originate loans with custimozied loan convenants and deploy low leverage.
2) On the private equity side, given lower valuation, we continue to be contrarian and explore traditional private investments across venture capital, mid-market buyouts and through secondary priavte equity transactions
- You can see that valuation has come down around 30-50% in the venture capital space in the past 12 – 18 months
- We expect to see these valuation correction will remain for a few more quarters, but signficiant technological innovation will continue to take place.
- My colleagues’ sharing on artificial intellignece (or AI) is just one area where billions of dollars were deployed recently despite the macro headwind.
- With increasing usage of data and booming application of AI, we expect semiconductors intustry to double in size by year 2030.
- We see many private investment opportunities in both software and hardware TMT sectors.
- Based on several market cycles in the past 30 years, we anticipate 2023 – 2024 to be one of the most interesting vintage years to put capital to work in private equities.
3) Lastly, the current uncertainties in the public equity markets has created a more interesting environemnt for fundamental equity hedge funds
- Industry level and stock level return dispersion will remain high for the forseeable future.
- Fundamental analysis will pay off in this range bound market. With inflation remain at elevated level and investors focus more on company fundamentals and cashflows, fundamental equity hedge funds will be able to generate alpha in both long and short positions.
- We prefer portfolio managers who have managed captial successfully throguh multiple past market cycles, with a low to moderate net exposure.
- We expect 10-12% net annualized return from such strategy going forward.
Given the views you just heard on the macro outlook, policy, and market sentiment, here are the key themes we are focused on for the rest of 2023. First lock in attractive yields. The market backdrop is highly unpredictable – whether recession or no recession – we think growth will continue to weaken from here and bonds offer an attractive risk-adjust reward. Next, this cycle is very desynchronized, the US is slowing just as China is recovering, global central banks are at completely different points in the their cycles, this creates opportunities in currencies, structures that take advantage of outperformance or dispersion, and Chinese equities. Beyond desynchronization, markets have been very range bound, most major indices have been choppy but broadly trading withing a range and we think this can continue. In fact many of our price targets point to minimal upside, but this doesn’t mean investors can’t benefit, there are structured products that can generate yield from range bound markets, as well as hedge funds and quantitative strategies that can generate uncorrelated alpha. Next, we continue to suggest using private markets to build exposure to long-term trends such as artificial intelligence, software, and new energy, and was as geopolitical trends driving investment in new infrastructure and logistical networks. Lastly, we end with our evergreen solution of reducing portfolio concentration and making sure your portfolio is well diversified across geographies and asset classes. In this highly unpredictable economic cycle, diversification is the best thing you can do for your portfolio.
Despite headwinds and uncertainties that persist in the current market environment, we are busier than ever in the Alternative Investments Team at J.P. Morgan Private Bank this year. We see a number of contrarian opportunities through private investments across equity, credit and real estate. Timing is extremely interesting now for medium to longer term investments. We target to capitalize on attractive entry valuation multiple and participate in secular growth areas such as technology, healthcare and even in traditional industrials.
We continue to advocate an diversified approach across strategies and geography. Yet, we are excited to see several opportunities arise due to temporary market dislocation. We can rely on our private investment managers to generate alpha through active management. They depend much less on market direction or beta.
We have three high conviction areas:
1) Interest rates will remain high for the foreseeable future and credit spread have widened, these create cotinuted pressure in corporate financing
- we see a large volume of around 250-300 billion dollars of corporate credit that are maturing in the next 3 years.
- Banks are potentially facing increased regulation and higher capital requirements. They are less active in syndicated bank loan space and also underwrite less high yield bonds
- Weak loan documentation and liquidity pressures in public debt markets create an opportunity for direct lenders to step in on a more senior basis.
- We prefer senior secured first lien private credit managers in the dislocation. These loans can generate 11-13% net internal rate of rate (or IRR) with around SOFR + 750 basis points of coupon. These yield are more than 200 basis points higher than 12 months ago.
- We prefer managers who can originate loans with custimozied loan convenants and deploy low leverage.
2) On the private equity side, given lower valuation, we continue to be contrarian and explore traditional private investments across venture capital, mid-market buyouts and through secondary priavte equity transactions
- You can see that valuation has come down around 30-50% in the venture capital space in the past 12 – 18 months
- We expect to see these valuation correction will remain for a few more quarters, but signficiant technological innovation will continue to take place.
- My colleagues’ sharing on artificial intellignece (or AI) is just one area where billions of dollars were deployed recently despite the macro headwind.
- With increasing usage of data and booming application of AI, we expect semiconductors intustry to double in size by year 2030.
- We see many private investment opportunities in both software and hardware TMT sectors.
- Based on several market cycles in the past 30 years, we anticipate 2023 – 2024 to be one of the most interesting vintage years to put capital to work in private equities.
3) Lastly, the current uncertainties in the public equity markets has created a more interesting environemnt for fundamental equity hedge funds
- Industry level and stock level return dispersion will remain high for the forseeable future.
- Fundamental analysis will pay off in this range bound market. With inflation remain at elevated level and investors focus more on company fundamentals and cashflows, fundamental equity hedge funds will be able to generate alpha in both long and short positions.
- We prefer portfolio managers who have managed captial successfully throguh multiple past market cycles, with a low to moderate net exposure.
- We expect 10-12% net annualized return from such strategy going forward.
Given the views you just heard on the macro outlook, policy, and market sentiment, here are the key themes we are focused on for the rest of 2023. First lock in attractive yields. The market backdrop is highly unpredictable – whether recession or no recession – we think growth will continue to weaken from here and bonds offer an attractive risk-adjust reward. Next, this cycle is very desynchronized, the US is slowing just as China is recovering, global central banks are at completely different points in the their cycles, this creates opportunities in currencies, structures that take advantage of outperformance or dispersion, and Chinese equities. Beyond desynchronization, markets have been very range bound, most major indices have been choppy but broadly trading withing a range and we think this can continue. In fact many of our price targets point to minimal upside, but this doesn’t mean investors can’t benefit, there are structured products that can generate yield from range bound markets, as well as hedge funds and quantitative strategies that can generate uncorrelated alpha. Next, we continue to suggest using private markets to build exposure to long-term trends such as artificial intelligence, software, and new energy, and was as geopolitical trends driving investment in new infrastructure and logistical networks. Lastly, we end with our evergreen solution of reducing portfolio concentration and making sure your portfolio is well diversified across geographies and asset classes. In this highly unpredictable economic cycle, diversification is the best thing you can do for your portfolio.