JP Morgan Asset Management looks at a globally diversified portfolio from different angles in order to achieve a better allocation. Global investing is a must. The source of equity returns is becoming less beta-driven. Active investing is now more appropriate, and themes can provide the necessary alpha. And the digital revolution continues unabated.
JP Morgan AM’s global market strategist Vincent Juvyns (pictured), as part of interviews carried out sister site Investment Officer Belgium, pointed out that the market uncertainties have increased in recent weeks, partly because of rising inflation.
However, he said he himself is not worried, as are many of his colleagues. A survey conducted by the fund manager among some 250 financial sector professionals in mid-May showed that the vast majority declare themselves positive. Asked what they expect from global equity markets over the next 18 to 24 months, 43 per cent of those surveyed gave an answer of an above-average return, 27 per cent an average return and 30 per cent a below-average return.
“We are also optimistic, but we do see a change in the source of equity returns: less beta-driven and more driven by other elements such as share buybacks and dividend growth,” he said.
However, Juvyns also points out that the average valuation of the markets is well above the historical average and this could create some headwinds. “This could create a headwind for the long term rather than the short-term returns,” he said. He is also convinced that not all the good news has yet been factored into share prices, as macroeconomic news and earnings growth, along with expectations continue to surprise positively.
Because of the decline in long-term return expectations, Juvyns does see the source of those returns changing over time. “Returns were driven in 2020 by the expansion of valuation ratios and this year by favourable earnings growth,” he said. “And as the market cycle becomes more mature, we expect dividends and share buybacks to support markets. Companies will use their rising profits to provide additional remuneration to shareholders and the regulators will allow that to happen again,” he continued.
He is certainly not going to follow the stock market adage ‘sell in May’ as the strategist wonders what to do with the freed up cash. Buy bonds or hold cash? “Not a good option, because today there is more income to be had from equities than bonds,” he said.
Active management pays off
Juvyns is convinced that in the current market conditions with fairly expensive markets, active management can generate alpha. “In the US equity markets, the spread between the most expensive 20 percent of stocks and the cheapest 20 percent has never been so high, and globally, the difference between the two extremes is even higher, he explained. “An ideal environment for a portfolio manager to generate alpha. Not to mention other opportunities for managers to create added value, such as through a theme like climate change.”
Fund manager Helge Skibeli adds that JP Morgan AM has an advantage because “we track 2,500 stocks across 17 sectors worldwide, which is more than 90 per cent of the total market capitalisation in the world.”
“And we have the ability to pick the best ideas from each sector without any geographical barriers. Our choices for Samsung Electronics and Nextera Energy, which are among the best in their segments, are great examples of this. The latter also has an excellent ESG rating as a renewable energy developer,” Skibeli further explains.
Long-term investment themes
Fund manager Caroline Keen has identified long-term structural growth themes that will colour the global equity landscape and that can be included in a global portfolio. “We think today is a good time to pick up growth values, especially after the price falls of the past few weeks.” She highlights digital revolution, the green economy, conscious consumption, innovation in healthcare and inclusion.
“We have chosen these themes because they will last for several economic cycles, allowing us to focus fully on the companies themselves, and we definitely want to include them in our portfolios.’”
She also expects a lot from the digital revolution because it is important for all companies in all sectors. It will continue to gain momentum as companies gain enormously by operating digitally. “Internally, we compared digital leaders and laggards in terms of growth, ROE and balance sheet strength and found that the leaders were ahead in all three areas.”
“Nike is an example of a company that has embraced the digital revolution extremely well. We believe Nike can double in the next five years,” she added She said inclusion is of great importance to her because it is a very positive theme that seeks to reduce inequality in a number of areas.