Now is the time for investors to review their portfolios and consider a greater degree of diversification such as alternatives for income and growth, J.P. Morgan Asset Management said.
As spike in correlations between core government bonds and equities tested the principles of balance and diversification in portfolio construction and the global economy and markets would gradually resume normality, investors should look beyond the traditional equity and bond allocations in portfolios.
“Markets are forward looking and will likely lead the economic recovery, however, history shows that the economy can recover lost output from a recession faster than the equity market gets back to prior highs. While valuations have made the long run outlook for equities better, we remain cautious until the earnings picture becomes clearer,” Kerry Craig, global market strategist at J.P. Morgan Asset Management, noted.
“Investors should remain vigilant to what the market is pricing and realise that market rallies in a longer bear market are not unusual.”
According to him, not all fixed income sectors were equal and there was a need to differentiate between those sectors that were supported by central banks such as government bonds or investment grade debt and those that were not.
As government bond yields were now depressed and likely to remain so, given the commitments by central banks to keep rates low, investors could eventually look into higher-risk fixed income sectors for yield but would need to focus on quality at the same time, particularly when it comes to the balance sheet and the ability to maintain credit ratings.
“Investors are likely to stay defensive until there is clarity over the health response to the virus. But this is exactly when investors should review how portfolios performed during this period and consider a greater degree of diversification that includes alternatives for income and growth,” Craig concluded.