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JPM multi-asset CIO: top five investment priorities for 2018

Blockbuster multi-strategy manager outlines the key multi-asset calls for the year ahead.

Gearing up for the next 12 months, JPM Asset Management’s CIO of multi-asset solutions, James Elliot, has fixed his gaze on five major investment priorities for 2018, he told Citywire Selector.

Macro trends are as some of the most important drivers for asset class returns and it is crucial to keep a close watch on those that are expected to be transformative in 2018, he said.

Elliot manages a range of funds at JPM AM, including the €4.47 billion JPM Global Macro Opportunities fund, which he runs alongside Talib Sheikh and Shrenick Shah.

Here, the multi-strategy specialist reveals the five investment priorities to watch out for 2018.

The Alt Ucits - Multi Strategy fund returned 23.3% in euro terms over three years to the end of November 2017. This compares to the average manager’s performance in the sector of 3.4% over the same period of time.

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1. Rising rates in the US

A major priority for multi-asset investors in 2018 is to keep a close eye on the rising interest rate environment in the US over the course of the year.

‘We think the Fed will move more rapidly than the market currently expects and rates will rise as a consequence. We also feel there is little pricing of any upside to inflation anywhere in markets.’

This means that Elliot continues to favour equities relative to bonds across the broad range of portfolios, he said. In terms of macro strategies, the group is long US banks, where they expect share prices to rise and short defensive bond proxy utilities, which could lose favour relative to bonds in a rising interest rate environment.

The manager’s penchant for equities can been in the JPM Global Macro Opportunities fund's allocations. Here 79.9% of the portfolio is invested in equities as of the latest fund factsheet which covers to the end of November 2017. This is while 20.1% is invested in cash.

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2. US equity rally

The US equity rally is indeed in late cycle and the next stage is recession. However, Elliot said the team is not ready to call time on it just yet.

He said there are signs clearly pointing to an extended late cycle, including robust consumer and business data and low unemployment but that does not mean the cycle is coming to a close.

‘Over the last three economic cycles, the late phase has lasted between two and five years, often with considerable gains in risk assets.’

One of the manager’s intermittent plays on the maturing cycle has been a tactical long dollar vs a short yen position. This allows the fund to benefit if the dollar strengthens against the yen, Elliot said.

‘This reflects our expectations of normalising US monetary policy vs a Bank of Japan that appears committed to extremely accommodative policy for at least the next few quarters.'

The importance the manager places on this can be seen in the JPM Global Macro Opportunities fund, as the ‘Maturing US cycle’ theme is the second largest in the theme risk breakdown, at 17.7%.

On the whole, North America poses the biggest risk in terms of regional risk breakdown, as it represents more than a quarter (25.5%) of risk in the fund, which is closely followed by Asia ex Japan, at 22.6%.

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3. Technology

Among the biggest priorities in 2018 for multi-asset managers is to keep a keen eye on technology, which is now too big to ignore, Elliot said.

‘With innovation and adoption accelerating rapidly, technology’s influence on winners and losers is filtering into almost every sector of the economy.’

The unstoppable progress of technology has seen data generation grow so fast that data created in the last two years alone represents 90% of all the data that has ever been created, he said. Semiconductor manufacturers are benefitting the most directly as faster adoption is driving increasingly diversified demand.

‘This demand will only grow as the semiconductor content of everyday items increases with the rise of the “Internet of Things” - home appliances, vehicles and other devices with network connectivity.’

The JPM Global Macro Opportunities fund ranks the ‘widespread technology adoption’ as the fourth biggest theme risk, representing 12.1% in the breakdown.

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4. China’s economic transition

China’s economic transition continues to be a priorities topping the agenda for James Elliot. The transition from an investment-led to a consumption-led economy had previously been expected to be bumpy with a relatively high chance of disruption, but it now seems the shift should happen in a ‘sustainable’ manner.

‘GDP growth has surprised positively over the course of 2017 and progress is being made on rebalancing, which suggests growth will be higher quality and more sustainable,’ Elliot said.

The transition has been helped along by the authorities’ effective support, focused on financial stability and environmental policy. This has been done by investing heavily in research and development and innovation in ‘new economy’ service sectors, such as technology.

This key priority is reflected in the JPM Global Macro Opportunities fund that Elliot runs as the ‘China in transition’ theme is the largest theme risk, at 18.8% of the portfolio.

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5. Understanding the cycle

A key challenge asset allocators will face in 2018 is balancing the current broad range of positive economic indicators against the length of the post global financial crisis cycle, according to Elliot.

‘We are now nine years into an economic and market recovery and it seems odd to be discussing the current positive outlook for equities relative to other asset classes in that context.’

Even so, every cycle is different, he said, and the current one has been characterised by low global growth. That said, over the last 12 months we have seen the first globally synchronised upswing since 2010, with above trend growth in most regions.

‘Although the US is in a mature phase of its cycle, other regions such as emerging markets, are only 18 months into a new cycle. There will be ample opportunity for returns to asset allocation decisions and the late cycle itself tends to favour active management as dispersion increases.’

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