Cautiously optimistic or just plain cautious?
Despite recessionary risks coming through, JPMorgan’s asset management team doesn’t necessarily see a full blown recession occurring in 2019, but nevertheless, Money Management took a deep dive into global equities to unpack some of the fund manager’s themes for the year ahead.
Global market strategist, Kerry Craig, and managing director, multi-asset solutions, Olivia Maywell, both observe we’re in a late cycle, which they acknowledge isn’t exactly the sweet spot for investing.
The US, anyway, is definitely showing all the signs of being in a late cycle, and looks a little more gloomy with earnings downgraded, which is a symptom of an upcoming recession.
“Although we don’t see any imminent downturn, investors need to proceed with caution by positioning their portfolios for the late cycle,” said Craig. “That means adding more resilience through diversification.”
But while US numbers are softening, Craig says balance sheets are still strong, and it’s still a hot spot for quality companies to be found.
Craig said for the firm to have conviction and be more constructive on global equities right now though, they need some more clarity on the US-China trade war, the US Fed, and politics. Understandably, this looks to be a little difficult.
What they do suggest, is to focus on portfolio resilience, and positioning through the cycle, rather than for the end of it.
Where to avoid? While it shouldn’t be taken as a blanket statement, the team suggests short-term investors should avoid emerging markets given their volatile nature.
Maywell also said that growth in Europe looked “much less interesting” than the US and China, and Brexit was affecting sentiment in the EU too.
On a local note, Craig said the fund tends to steer clear from Australian equities and opts for international equities for their diversification benefits. He said the outcome of the upcoming election would determine whether Australian investors continue to push behind Aussie equities at all without the franking credit benefit.
Ultimately, the fund managers indicated they would pull back on equities, which is something they said worked for them in Q4 of 2018.
Data from FE Analytics shows the global equities sector returned 1.76 per cent for the 12 months to 30 November 2018, which trumps the -2.17 per cent returned by the Australian equity sector.
North American equities soared in that same time period with the sector average returning 9.90 per cent, and given the sector is predominantly constructed of ETFs, it suggests the market was, on average, still quite strong last year.
The JPMorgan Global Macro Opportunities fund returned 0.54 per cent for that time period as compared to the MSCI World, which returned 4.67 per cent. For 2018’s Q4, JPMorgan data provided to Money Management shows the fund’s move to actively reduce equity exposure and add protection to the fund paid off, with the fund returning 2.9 per cent as opposed to the index, which dropped to -13.5 per cent in that time period.
The chart below tracks the performance of the JPMorgan fund as compared to the MSCI World Index and the global equities sector for the 12 months to 30 November 2018.
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