Please join our EMEA Private Bank Experts as they discuss what has happened in financial markets, how we have positioned our portfolios, and how our portfolios have performed despite the market volatility.

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David
Hello everyone, My name is David Stubbs, Head of Market Strategy & Advice, International Private Bank, and today I am catching up with Stewart Edginton, who leads a team of specialist focusing on our core discretionary strategies. An interesting year in markets, last year both Equity and debt marking money, this year, a lot more challenging. Give us an update on where we stand with markets today.

 

Stewart

As you say, the difference between the two years could not be more stark, last year a balanced portfolio would have returned 18-19 %, we achieved that through, having an over-weight to risk and equities, but also we had quite long duration in our fixed income and as yields have been moving down, that benefitted us and we saw some good capital growth there. Now the question is what has happened at the start of this year as the Corona virus hit and market volatility went up. The good news there is that in our portfolios that long duration helps us. Through our fixed income positioning we have moved to about 7 years duration and we have also sold down a lot of our high yield and credit positions, which in that first quarter really suffered from that volatility and spread widening and has delofted in the fixed income portfolio. As we went in to that first quarter, in actual fact, being overweight sovereign and having that longer duration we actually saw our fixed income giving positive returns, something like 2-3 % and that helped buffer some of the equity volatility that we saw. It outweighed those declines and through March, we steadily reduced our equity positions. We moved in a couple of tranches. Come mid-March, we reduced our equities in total by 10 %, vs our long term positioning, 6-8% underweight equites. The reason being that there could be another letdown. Since we did that in mid-March, we have had better news from central banks, governments and we are seeing huge injections around the world, such that we feel that systemically, markets are in a much better position than during the GFC. We feel better about that, but we are in a recession here and we wi8ll see some extreme levels of unemployment, particularly in the US where they have not protected as much as in Europe, and we feel that it will take some time to recover that to the earnings levels we had in 2019, and we think it will be a longer recovery. If you look at equity markets, they seem to be discounting a v-shaped recovery, we think that is somewhat overdone, and think it will take longer. Therefor, in the short-term, equities have got a little ahead of themselves, nevertheless, we are looking at areas where we can take advantage, of risk and the disruption that has happened, so we have just started buy into some high-yield positions. I mentioned earlier that we had sold those last year when spreads where around 250 bps, as they moved out to 1000 bps wide, we started to reintroduce that back into portfolios. As those spreads have started to climb we have added again. So that is an interesting call, because we have added back into the credit side of things rather than the equity side. As I said, we feel that has got a bit ahead of itself and we feel there could be more volatility on that.

 

David

Thank you, Stewart, so where does that leave us in terms of performance on our portfolios going into the volatility with that long duration but having some equity exposure above benchmark, making those changes? Where does that leave us now?

 

Stewart

So as I mentioned, we were up around 18-19% last year for a balanced portfolio, if I take those same portfolios this year to end April, a dollar portfolio would be 6.5% and a Euro portfolio around 5.5%, because we have also overweight USD so that helped the Euro and Sterling portfolios. So you can see through that, if you take that full period we have compounded +10%  return through that period, and as you say, I think the real key to that has been having that duration positioning, which by the way, we are maintaining.

 

Some people ask, well why keep that duration with inflation risk? We really don’t see inflation as a risk and instead we see that duration as insurance and protection in portfolios should we see vol flare up again.

 

David

Great thank you, so what would we need to see to really increase our Equity overweight at this point?

 

Stewart

The first thing of course is to see whether there will be some kind of cure or vaccination, that seems some way away so that is not something that we expect anytime soon. We are very much focused on fundamentals. Where are earnings going to get to? What kind of multiples do you apply to that? Where we are today, that just all feels a little rich, and I think what it would really take would be something that causes markets to dislocate again, and then another dip , then we would be looking to buy into that. So it’s the difficult thing of the short term vs the long term. Long term we think that we will suddenly cycle and equities will be the place to be, but in the short term we are looking for some weakness before we add again.  

 

David

Thank you Stewart. Thank you for dialing in to this audiocast for an update on positioning and performance from our CIO strategies. Join us again when we will be going through in more detail the organizational and institutional process we have around these strategies, and the changes we have made there to ensure the best possible combination of performance and flexibility. Until then, if you want more information on this or any other investment product, please speak to your J.P. Morgan advisor.