Tara Smyth, the head of investments for the Middle East at JP Morgan Private Bank
What is the asset class and geography you are focused on?
Within equities, the United States continues to be the largest allocation we hold, as it is the region providing the highest growth visibility while valuations are not expensive. Europe is, however, our biggest focus within portfolios, as we expect earnings growth to accelerate substantially as the euro zone economy continues to recover broadly. We also are overweight on hedge funds and recommend allocating across multiple strategies. We especially favour event-driven, long-short funds and relative value/credit strategies.
What is the outlook for the month ahead?
We really haven’t changed our view – though we have adjusted macro forecasts lower to recognise that the first quarter was somewhat of a lost quarter for US growth. So far, the year is turning out more or less as we expected in January. Almost everything has risen in single digits (US, European and emerging-markets stocks, fixed-rate and inflation linked government bonds, high grade and high yield corporate bonds, and commodities). We believe equity markets will drive portfolio returns over the next year, but return expectations need to be managed down to earnings growth. The key takeaway is that we take a long-term strategic approach to managing portfolios, which we complement by making tactical trades with a six- to 12-month time horizon. That said, the typical summertime market volatility, which could be because of a combination of low liquidity and political headlines, may provide an attractive entry point for the long-term investor.
What are the main risks, either upside or downside, to the outlook?
An escalation in geopolitical risk may create some short-term volatility, although historically most of these events had no long-term effect on markets. This is why we focus on the business cycle. Upside risks include an acceleration of global growth faster than expected, likely because of a rebound in the US on the back of bad weather earlier this year, leading to inflation accelerating quicker than forecasted by the Fed. We believe the stabilisation we’re seeing in most emerging markets, and the broadening of the European recovery, will balance out any unexpected economic acceleration. On a global basis, demand and inventory trends suggest a pickup in economic activity in the second half of the year. If so, our high single digit forecast for this year’s equity market returns should be able to withstand the onset of (eventually) tighter monetary policy in the US. The ongoing M&A boom will also help that trend.
What is the best investment at the moment?
We believe that equities will be the main driver of performance for the months to come, while fixed income with a gradual increase in rates for the US is an area where we want to play smart defence but implement shorter-duration and less benchmark-like investments. We take a portfolio approach to investing, which focuses on multiples opportunities that complement one another. We see opportunity in financials with potential to substantially increase dividends, in activist managers with the opportunity to enhance corporate profitability and shareholder returns, and in flexible fixed income managers that can generate positive returns regardless of where long term rates will be.
What was the best investment you were ever involved in?
Our call on US high-yield [bonds] in 2009 was an exceptional investment in that it generated equity-like double-digit returns with much less risk. Our recent addition to US equities last summer and adding to Europe earlier this year have also worked well. We also had exposure to German mid-cap as the euro zone crisis was under way, which was the right area of the market to focus on and a big contributor to performance throughout that time.
What was the worst?
Commodities underwent a strong rally in the first quarter driven by weather-related factors, which portfolios did not entirely benefit from. Importantly, our outlook has not changed significantly and we have not been chasing these markets. We remain cautious on commodities, looking for specific investments, and as we expect the US rates to gradually go up, we maintain our low-duration target in fixed income. Our short-duration bias has proven to be too cautious over the past couple of years, but we would certainly err on the safe side again. We continue to be cautious on long-term government bonds.
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