Challenges and opportunities for investors as the cycle matures
Our fourth Portfolio Perspectives event in London in late March featured some of the industry’s most successful investors. A total of 16 external speakers from large firms and boutiques presented their views on a range of topics from geopolitics to technology and the psychology of investing. They were joined by former UK Prime Minister Tony Blair and former Italy Finance Minister, Vittorio Grilli, who discussed Europe’s complex past and future.
Portfolio Perspectives is just one example of how the breadth and reach of the J.P. Morgan platform benefits our clients through market-leading intelligence. You can find out more in the session summaries below, or click here to view the full agenda.
This year’s Portfolio Perspectives took place against a background of uncertainty. However, there is also optimism about the outlook for financial markets as the current business cycle reaches its later phases. Following a disappointing 2018, stock markets around the world have delivered decent returns over the first quarter of 2019.
One of the reasons is the recent policy shift by the Federal Reserve (Fed). After three years of raising interest rates, the central bank will keep them steady, at least for this year, slowing the reduction in its balance sheet. The decision suggests a recognition that the US economy is entering a more sluggish period, and could offer continued support for risky assets.
Yet risks remain. They include political uncertainty associated with the upcoming US presidential election campaign and the UK’s Brexit negotiations as well as ongoing trade talks between America and China. There are also concerns about the levels of US corporate debt and whether any further increase in rates could trigger an increase in default rates.
Two correlations in the mind of the Fed are now inexplicably broken: (1) the correlation between employment and wages, and, more importantly, (2) between wages and inflation.
Highlighting the depth of their research capabilities, Mark Holman, TwentyFour Asset Management; Simon Henry, Wellington Management and Alan Breed, Edgewood Management discussed trends they believe offer a source of potentially attractive opportunities for investors.
The rise of electric vehicles (EVs) seems inevitable – they are more environmentally friendly, cheaper to run, more durable and often safer than their non-electric counterparts. Although the US, Germany and Japan are often seen as leaders in the auto industry, China is on track to become a driving force.
China is the largest EV market today, representing about 55% of sales. The government is providing significant capital in the form of subsidies, research and development, grants, tax breaks and various other incentives to develop a world-class EV industry. In particular, the country is developing batteries at an extremely fast rate as it attempts to catch up with other leaders in the field.
You only need to look at the choice of car for James Bond in his next movie. It’s going to be an electric Aston Martin, which shows quite how much times are changing.
Redefining business with technology
Data and technology have become increasingly important for many companies and industries. Although online sales are growing, the potential for some businesses also comes with challenges over protecting their brand. For high-profile companies in particular, the lack of price protection can inhibit their ability to fully embrace an online retail approach. Although online distribution platforms provide valuable opportunities, businesses must continue to invest to make the most of them.
For example, Estée Lauder hired CEO Fabrizio Freda a decade ago to transform its business model. Fabrizio recognised the need to move away from the traditional department store approach, instead occupying more space in travel retail. In addition, 75% of the company’s advertising is now more targeted to consumers. This transition involves more visibility on platforms such as YouTube, where videos about beauty are the second most-viewed category. In the 10 years since Fabrizio’s appointment, his acquisitions have delivered a return on investments of more than 20% a year.
The number one thing people watch on YouTube is music videos and the number two is beauty channels. This influencer market place can have tremendous results on how products are sold.
With its high savings rate, large population and higher propensity to reform, the Chinese economy is on course to become two or three times larger than that of the US by 2050. China is making efforts to join the global financial system and increase domestic consumption.
There are ongoing concerns about recent weakness in the Chinese economy, and whether the pace of growth will continue to slow or stabilise. However, as its financial markets become more accessible to foreign investors, the range of investment opportunities is increasing.
For example, the sell-off in growth stocks in 2018 means there are now quality companies available in China at more reasonable valuations. Despite the shift towards monetary easing, some volatility may remain in Chinese equities. Foreign investors own between 2.5% and 3% of the A-shares market, which is today worth around $7 trillion. This figure is set to change as A-shares are now included in the major indices, with MSCI announcing it will add more shares this year.
The outlook for fixed income looks positive. Chinese government bonds are set to join the Bloomberg Aggregate Index in 2019. China should make up around 6% of this index over the next two years, meaning $150 billion of investment will flow into the country. Put in context, outstanding sovereign dollar debt across emerging markets is worth $1.1 trillion and a third of this will go in to the Chinese government bond market.
I’m not so worried about the high debt levels in China because they are financed by high levels of deposits and there’s not a lot of leverage in the banking system.
As the five-yearly elections to the European Parliament approach, the region is facing a period of upheaval due to Brexit uncertainty and shifts in the political outlook. There is increasing tension between countries wanting to retain their identity as nation states against the need for greater integration and cooperation.
The rise of populist sentiment in Europe has been demonstrated by the election of Matteo Salvini’s Northern League and Luigo Di Maio’s Five Star Movement in Italy. The government has a fraught relationship with the EU and has introduced strict migration laws since coming to power in 2018. It has also agreed to join China’s Belt and Road Initiative, which is opposed by other member states.
In contrast to Italy, French President Emmanuel Macron continues to be optimistic about Europe’s role and its future. Meanwhile, the relationship between the US and Europe remains complex, but both sides would benefit from a strong, close relationship.
Beyond these issues, one of the major challenges for Europe – and Western economies in general – is likely to be the advent of new technologies. Political differences aside, the impending technological revolution will require cooperation between different countries to ensure no one is left behind.
The British anxieties that gave rise to Brexit are European anxieties and are not just confined to Britain. It’s just that Britain had a referendum.
The field of behavioural finance examines how our biases affect our financial decisions. One of the longest-established biases is overconfidence – we all tend to overestimate our abilities. In financial markets, this tendency has a variety of consequences that can be used to build a better portfolio. An example of overconfidence responding to the market is called bias self-attribution.
For instance, imagine you have no portfolio management skills and you buy shares from a company. If the share price goes up, you’ll think you’ve made a good decision. If it goes down, you’ll think it’s bad luck. As a result, you’ll increase your trading activity after good outcomes, generating volume patterns. Meanwhile, behavioural finance investors try to take the other side of the trade and take advantage of price movements.
Another bias is the anchoring effect – if you’re shown a number and then asked to estimate an uncertain quantity, your estimate is likely to gravitate towards the number you were shown. For example, a company may announce results that are better than those in its earnings per share forecast. In response, analysts may adjust their forecast upwards, but not enough. As a result, this can create a systematic pattern of underreaction, causing momentum trends within the market.
How can we control behavioural biases when investing? Some systems are designed to avoid human interaction at stressful times, while others focus on a disciplined evidence-based approach. Biases can also provide compelling investment opportunities due to mispricing. Behavioural investors often take advantage of more robust features of the market such as behavioural valuations, quality characteristics and the tendency of asset prices to trend.
People would rather fail conventionally than succeed unconventionally because it's harder to stand away from the crowd.
In the past, shareholders engaged with companies by attending AGMs and through proxy votes. More recently, investors are increasingly embracing environmental, social and governance (ESG) factors as a way to better understand how businesses are managing their risks. It can also help them to identify companies that have the potential to deliver attractive returns for many years to come.
In today’s rapidly changing world, it’s important for shareholders to gain a sense of whether management teams are fit for purpose. For example, it used to be a straightforward decision to invest in companies with strong competitive positions due to brand loyalty. But many of today’s customers demand an emotional connection with the products they buy.
When engaging with businesses as an investor, the issues can vary depending on the sector. For example, drug pricing for pharmaceutical firms was a key topic during the 2016 US presidential election campaign. For manufacturing companies, quality and efficiency can be important factors to explore.
Companies are increasingly vulnerable to stakeholder concerns. For instance, oil firms with a poor reputation on climate change would be wise to change their position in order to recruit engineers. Managing these risks requires management teams that have an open and flexible attitude to dealing with multiple stakeholders.
It’s also important to be patient and be respectful with a company when you are trying to influence its behaviour. Developing a long-term relationship and helping companies understand what they should be reporting on can help, particularly when the information you require is not publicly available.
What are the prospects for generating an income in today’s environment? Notably, expectations from fixed income markets remain low. Over the past decade yields in both the US and Europe have fallen, and the risk-reward payoff remains challenging. However, in a period of economic and market uncertainty, selective opportunities may likely continue to appear.
The yield curve has recently inverted in the US, which is often an early warning sign that a recession is on the way. As the business cycle matures, many investors have been improving the credit quality of their portfolios as well as extending duration. We believe it’s important to stay invested even in relatively low-yielding assets because they can continue to generate a higher return than cash.
There are concerns about the lowest-quality US investment grade corporate bonds (those with a BBB credit rating), which make up about half of the $7 trillion market. If the economy starts to flirt with a recession and these companies suffer downgrades, then they could overwhelm the high yield market, which is only about $1 trillion in size today.
There are some opportunities in emerging market debt issued by both companies and sovereigns. Many countries are growing positively, tend not to have current account deficits, and are benefiting from both low global growth and a US Federal Reserve that has stopped raising rates.
At a time of low yields from bonds, multi-asset investors can look to take advantage of additional income opportunities by diversifying into equity markets. They include investing in companies that pay high dividend yields but are also able to grow their dividends. They can also find opportunities in specific sectors, such as insurance and infrastructure. Writing options is another strategy investors can use to generate an income.
If you look at the US investment grade market, it’s about $7 trillion in size. About $3.6 trillion of that is now BBB. That’s the largest BBB percentage of the market we’ve ever seen.
An inverted curve
The yield curve tends to flatten towards the end of the cycle, and reducing portfolio risk at this time can be beneficial.
Over the past 10 years, consumers have led the shift in digital technologies. Instead of calling people on the phone, we now send instant messages. Instead of going out to the shops, we buy online. This trend shows no signs of slowing. Companies are rapidly moving towards digital technologies and the cloud, creating a range of investment opportunities.
There are three themes leading disruption in the tech sector: e-commerce, online food delivery and the traditional advertising market. However, trends take time to establish themselves in the industry. For example, Uber is growing rapidly but only around 1% of the world’s transport is booked online or through apps. Until people transition from owning their own vehicle to ride sharing, Uber is unlikely to penetrate much more of the market.
Innovation is the main driver of tech, but there are risks. They include:
The issue of regulation is particularly prevalent in the tech sector. For instance, Facebook is under regulatory scrutiny and has employed around 10,000 people to get rid of fake news on its platform. But as more regulatory burdens are placed on leading companies such as Facebook, it becomes harder for its competitors to penetrate the market.
In China, government policies make it difficult for foreign firms to compete with domestic ones, such as the forced technology transfer. This allows Chinese companies to innovate for a longer period of time while increasing barriers to entry into the country. A key area of focus in trade negotiations is the treatment of US intellectual property in China.
AGM Annual general meeting
CEO Chief executive officer
ESG Environmental, social and governance
EU European Union
EV Electric Vehicles
Fed Federal Reserve
MSCI Morgan Stanley Capital International Index
PACE Power Source, Autonomy, Connectivity and Electrification
UK United Kingdom
US United States
The views and information presented in this article are those of the speakers.
All market and economic data as of March 2019 and sourced from Bloomberg and FactSet unless otherwise stated.
We believe the information contained in this material to be reliable but do not warrant its accuracy or completeness. Opinions, estimates, and investment strategies and views expressed in this document constitute our judgment based on current market conditions and are subject to change without notice.
Learn more about becoming a J.P. Morgan Private Bank client.
Please tell us about yourself, and our team will contact you.
This material is for information purposes only, and may inform you of certain products and services offered by J.P. Morgan’s wealth management businesses, part of JPMorgan Chase & Co. (“JPM”). Please read all Important Information.
GENERAL RISKS & CONSIDERATIONS
Any views, strategies or products discussed in this material may not be appropriate for all individuals and are subject to risks. Investors may get back less than they invested, and past performance is not a reliable indicator of future results. Asset allocation/diversification does not guarantee a profit or protect against loss. Nothing in this material should be relied upon in isolation for the purpose of making an investment decision. You are urged to consider carefully whether the services, products, asset classes (e.g., equities, fixed income, alternative investments, commodities, etc.) or strategies discussed are suitable to your needs. You must also consider the objectives, risks, charges, and expenses associated with an investment service, product or strategy prior to making an investment decision. For this and more complete information, including discussion of your goals/situation, contact your J.P. Morgan representative.
Investors should carefully consider the investment objectives and risks, as well as charges and expenses of the mutual fund, variable annuity or exchange traded fund before investing. To obtain a prospectus, contact your investment professional or visit the fund company’s or insurance company’s Web site. The prospectus contains this and other information about the mutual fund, variable or fixed annuity and/or separately managed accounts underlying product. You should read the prospectus carefully before investing.
Investing in fixed income products is subject to certain risks, including interest rate, credit, inflation, call, prepayment and reinvestment risk. Any fixed income security sold or redeemed prior to maturity may be subject to substantial gain or loss.
Certain information contained in this material is believed to be reliable; however, JPM does not represent or warrant its accuracy, reliability or completeness, or accept any liability for any loss or damage (whether direct or indirect) arising out of the use of all or any part of this material. No representation or warranty should be made with regard to any computations, graphs, tables, diagrams or commentary in this material, which are provided for illustration/reference purposes only. The views, opinions, estimates and strategies expressed in this material constitute our judgment based on current market conditions and are subject to change without notice. JPM assumes no duty to update any information in this material in the event that such information changes. Views, opinions, estimates and strategies expressed herein may differ from those expressed by other areas of JPM, views expressed for other purposes or in other contexts, and this material should not be regarded as a research report. Any projected results and risks are based solely on hypothetical examples cited, and actual results and risks will vary depending on specific circumstances. Forward-looking statements should not be considered as guarantees or predictions of future events.
Nothing in this document shall be construed as giving rise to any duty of care owed to, or advisory relationship with, you or any third party. Nothing in this document shall be regarded as an offer, solicitation, recommendation or advice (whether financial, accounting, legal, tax or other) given by J.P. Morgan and/or its officers or employees, irrespective of whether or not such communication was given at your request. J.P. Morgan and its affiliates and employees do not provide tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any financial transactions.
IMPORTANT INFORMATION ABOUT YOUR INVESTMENTS AND POTENTIAL CONFLICTS OF INTEREST
Conflicts of interest will arise whenever JPMorgan Chase Bank, N.A. or any of its affiliates (together, “J.P. Morgan”) have an actual or perceived economic or other incentive in its management of our clients’ portfolios to act in a way that benefits J.P. Morgan. Conflicts will result, for example (to the extent the following activities are permitted in your account): (1) when J.P. Morgan invests in an investment product, such as a mutual fund, structured product, separately managed account or hedge fund issued or managed by JPMorgan Chase Bank, N.A. or an affiliate, such as J.P. Morgan Investment Management Inc.; (2) when a J.P. Morgan entity obtains services, including trade execution and trade clearing, from an affiliate; (3) when J.P. Morgan receives payment as a result of purchasing an investment product for a client’s account; or (4) when J.P. Morgan receives payment for providing services (including shareholder servicing, recordkeeping or custody) with respect to investment products purchased for a client’s portfolio. Other conflicts will result because of relationships that J.P. Morgan has with other clients or when J.P. Morgan acts for its own account.
Investment strategies are selected from both J.P. Morgan and third-party asset managers and are subject to a review process by our manager research teams. From this pool of strategies, our portfolio construction teams select those strategies we believe fit our asset allocation goals and forward-looking views in order to meet the portfolio’s investment objective.
As a general matter, we prefer J.P. Morgan managed strategies. We expect the proportion of J.P. Morgan managed strategies will be high (in fact, up to 100 percent) in strategies such as, for example, cash and high-quality fixed income, subject to applicable law and any account-specific considerations.
While our internally managed strategies generally align well with our forward-looking views, and we are familiar with the investment processes as well as the risk and compliance philosophy of the firm, it is important to note that J.P. Morgan receives more overall fees when internally managed strategies are included. We offer the option of choosing to exclude J.P. Morgan managed strategies (other than cash and liquidity products) in certain portfolios.
The Six Circles Funds are U.S.-registered mutual funds managed by J.P. Morgan and sub-advised by third parties. Although considered internally managed strategies, JPMC does not retain a fee for fund management or other fund services.
LEGAL ENTITY, BRAND & REGULATORY INFORMATION
In the United States, bank deposit accounts and related services, such as checking, savings and bank lending, are offered by JPMorgan Chase Bank, N.A. Member FDIC.
JPMorgan Chase Bank, N.A. and its affiliates (collectively “JPMCB”) offer investment products, which may include bank-managed investment accounts and custody, as part of its trust and fiduciary services. Other investment products and services, such as brokerage and advisory accounts, are offered through J.P. Morgan Securities LLC (“JPMS”), a member of FINRA and SIPC. Annuities are made available through Chase Insurance Agency, Inc. (CIA), a licensed insurance agency, doing business as Chase Insurance Agency Services, Inc. in Florida. JPMCB, JPMS and CIA are affiliated companies under the common control of JPMorgan Chase & Co. Products not available in all states.
In Luxembourg, this material is issued by J.P. Morgan Bank Luxembourg S.A. (JPMBL), with registered office at European Bank and Business Centre, 6 route de Treves, L-2633, Senningerberg, Luxembourg. R.C.S Luxembourg B10.958. Authorized and regulated by Commission de Surveillance du Secteur Financier (CSSF) and jointly supervised by the European Central Bank (ECB) and the CSSF. J.P. Morgan Bank Luxembourg S.A. is authorized as a credit institution in accordance with the Law of 5th April 1993. In the United Kingdom, this material is issued by J.P. Morgan Bank Luxembourg S.A., London Branch. Prior to Brexit (Brexit meaning that the United Kingdom leaves the European Union under Article 50 of the Treaty on European Union, or, if later, loses its ability to passport financial services between the United Kingdom and the remainder of the EEA), J.P. Morgan Bank Luxembourg S.A., London Branch is subject to limited regulation by the Financial Conduct Authority and the Prudential Regulation Authority. Details about the extent of our regulation by the Financial Conduct Authority and the Prudential Regulation Authority are available from us on request. In the event of Brexit, in the United Kingdom, J.P. Morgan Bank Luxembourg S.A., London Branch is authorized by the Prudential Regulation Authority, subject to regulation by the Financial Conduct Authority and limited regulation by the Prudential Regulation Authority. Details about the extent of our regulation by the Prudential Regulation Authority are available from us on request. In Spain, this material is distributed by J.P. Morgan Bank Luxembourg S.A., Sucursal en España, with registered office at Paseo de la Castellana, 31, 28046 Madrid, Spain. J.P. Morgan Bank Luxembourg S.A., Sucursal en España is registered under number 1516 within the administrative registry of the Bank of Spain and supervised by the Spanish Securities Market Commission (CNMV). In Germany, this material is distributed by J.P. Morgan Bank Luxembourg S.A., Frankfurt Branch, registered office at Taunustor 1 (TaunusTurm), 60310 Frankfurt, Germany, jointly supervised by the Commission de Surveillance du Secteur Financier (CSSF) and the European Central Bank (ECB), and in certain areas also supervised by the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin). In Italy, this material is distributed by J.P. Morgan Bank Luxembourg S.A., Milan Branch, registered office at Via Cantena Adalberto 4, Milan 20121, Italy and regulated by Bank of Italy and the Commissione Nazionale per le Società e la Borsa (CONSOB). In addition, this material may be distributed by JPMorgan Chase Bank, N.A. (“JPMCB”), Paris branch, which is regulated by the French banking authorities Autorité de Contrôle Prudentiel et de Résolution and Autorité des Marchés Financiers or by J.P. Morgan (Suisse) SA, which is regulated in Switzerland by the Swiss Financial Market Supervisory Authority (FINMA).
In Hong Kong, this material is distributed by JPMCB, Hong Kong branch. JPMCB, Hong Kong branch is regulated by the Hong Kong Monetary Authority and the Securities and Futures Commission of Hong Kong. In Hong Kong, we will cease to use your personal data for our marketing purposes without charge if you so request. In Singapore, this material is distributed by JPMCB, Singapore branch. JPMCB, Singapore branch is regulated by the Monetary Authority of Singapore. Dealing and advisory services and discretionary investment management services are provided to you by JPMCB, Hong Kong/Singapore branch (as notified to you). Banking and custody services are provided to you by JPMCB Singapore Branch. The contents of this document have not been reviewed by any regulatory authority in Hong Kong, Singapore or any other jurisdictions. This advertisement has not been reviewed by the Monetary Authority of Singapore. You are advised to exercise caution in relation to this document. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice. For materials which constitute product advertisement under the Securities and Futures Act and the Financial Advisers Act, this advertisement has not been reviewed by the Monetary Authority of Singapore.
JPMorgan Chase Bank, N.A. (JPMCBNA) (ABN 43 074 112 011/AFS Licence No: 238367) is regulated by the Australian Securities and Investment Commission and the Australian Prudential Regulation Authority. Material provided by JPMCBNA in Australia is to “wholesale clients” only. For the purposes of this paragraph the term “wholesale client” has the meaning given in section 761G of the Corporations Act 2001 (Cth). Please inform us if you are not a Wholesale Client now or if you cease to be a Wholesale Client at any time in the future.
JPMS is a registered foreign company (overseas) (ARBN 109293610) incorporated in Delaware, U.S.A. Under Australian financial services licensing requirements, carrying on a financial services business in Australia requires a financial service provider, such as J.P. Morgan Securities LLC (JPMS), to hold an Australian Financial Services Licence (AFSL), unless an exemption applies. JPMS is exempt from the requirement to hold an AFSL under the Corporations Act 2001 (Cth) (Act) in respect of financial services it provides to you, and is regulated by the SEC, FINRA and CFTC under U.S. laws, which differ from Australian laws. Material provided by JPMS in Australia is to “wholesale clients” only. The information provided in this material is not intended to be, and must not be, distributed or passed on, directly or indirectly, to any other class of persons in Australia. For the purposes of this paragraph the term “wholesale client” has the meaning given in section 761G of the Act. Please inform us immediately if you are not a Wholesale Client now or if you cease to be a Wholesale Client at any time in the future.
This material has not been prepared specifically for Australian investors. It:
• May contain references to dollar amounts which are not Australian dollars;
• May contain financial information which is not prepared in accordance with Australian law or practices;
• May not address risks associated with investment in foreign currency denominated investments; and
• Does not address Australian tax issues.
With respect to countries in Latin America, the distribution of this material may be restricted in certain jurisdictions. We may offer and/or sell to you securities or other financial instruments which may not be registered under, and are not the subject of a public offering under, the securities or other financial regulatory laws of your home country. Such securities or instruments are offered and/or sold to you on a private basis only. Any communication by us to you regarding such securities or instruments, including without limitation the delivery of a prospectus, term sheet or other offering document, is not intended by us as an offer to sell or a solicitation of an offer to buy any securities or instruments in any jurisdiction in which such an offer or a solicitation is unlawful. Furthermore, such securities or instruments may be subject to certain regulatory and/or contractual restrictions on subsequent transfer by you, and you are solely responsible for ascertaining and complying with such restrictions. To the extent this content makes reference to a fund, the Fund may not be publicly offered in any Latin American country, without previous registration of such fund’s securities in compliance with the laws of the corresponding jurisdiction. Public offering of any security, including the shares of the Fund, without previous registration at Brazilian Securities and Exchange Commission—CVM is completely prohibited. Some products or services contained in the materials might not be currently provided by the Brazilian and Mexican platforms.
References to “J.P. Morgan” are to JPM, its subsidiaries and affiliates worldwide. “J.P. Morgan Private Bank” is the brand name for the private banking business conducted by JPM.
This material is intended for your personal use and should not be circulated to or used by any other person, or duplicated for non-personal use, without our permission. If you have any questions or no longer wish to receive these communications, please contact your J.P. Morgan representative.
© 2019 JPMorgan Chase & Co. All rights reserved.
INVESTMENT PRODUCTS ARE: • NOT FDIC INSURED • NOT A DEPOSIT OR OTHER OBLIGATION OF, OR GUARANTEED BY, JPMORGAN CHASE BANK, N.A. OR ANY OF ITS AFFILIATES • SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED
Bank deposit products, such as checking, savings and bank lending and related services are offered by JPMorgan Chase Bank, N.A. Member FDIC. Not a commitment to lend. All extensions of credit are subject to credit approval.