Developed market equities are increasingly attractive and credit could emerge as a prime location for risk-averse fixed income investors, according to JPM’s Michael Schoenhaut.
Schoenhaut, who currently has nine of the top 10 holdings in the €18.3 billion JPM Global Income fund allocated to equities, said the team has become more positive on the asset class due to reflationary market sentiment .
'We have a preference for developed markets, and a preference for credit in what we see as a world of rough trend growth, with some upside risks to both growth and inflation,' he told Citywire Selector.
Schoenhaut holds Paris-based Unibail-Rodamco in the top ten of the portfolio. This is with a 0.7% allocation to the commercial property investment company, which is the only non-equity position among the biggest bets.
'We maintain our opportunistic allocations to preferred equity and non-agency mortgages, which continue to be a diversifier to our other credit allocations.
'The political surprises in the US and Europe during 2016 have given governments a clear mandate to reflate their economies and address inequality.
'Investors are now expecting significant fiscal stimulus and a continued move away from the reliance on monetary policy to reinvigorate economic growth and inflation.'
Global equity accounts for 17.2% of investments, which is the second largest asset allocation behind global high yield.
Stocks vs. bonds
With political tension brewing across the globe, Schoenhaut has prominent regional allocations to the US (62.6%), Europe ex-UK (14.4%) and the UK (7.5%).
However, Schoenhaut, who runs the fund alongside Talib Sheikh, said rising growth and a shift towards reflation has reinforced the team’s positive view on stocks over traditional bonds.
'We maintain a positive fundamental view on US stocks and see the improving global economic environment creating a favourable backdrop for other equity regions.
'The correlation of equity and bond returns is likely to be less negative as nominal growth accelerates and central banks react to the change.’
Elsewhere, Schoenhaut has 35.9% of the portfolio allocated to high yield and said the team expects stock-bond correlations will become more prone to policy-induced spikes into positive territory.
'This implies that duration is a slightly less effective shock absorber for portfolios. There is often the misconception that a rising rate environment can be negative for all income-paying asset classes.
'Actually, this type of environment can present a range of opportunities for income investors who have the ability to take a multi-asset and dynamic approach.'
Schoenhaut said historical data indicates rate rises have not derailed the equity market as long as the rate rise comes from a low base.
'An improving growth outlook should be beneficial for corporate earnings and equity markets. In this environment, good quality dividend paying equities look attractive.
'We have significantly increased our exposure to financials which look attractive on a valuation basis and may be poised to do well in a rising rate environment, as banks will benefit from a steeper yield curve.'
Schoenhaut admits that bond investors may have entered a difficult period, particularly as yields begin to rise, but said flexibility will be key.
'US high yield continues to look attractive as US growth is likely to improve from trend-like levels, due to the expectation of tax reform, less regulation and fiscal spending.
'Opportunistic allocations to alternative credit such as non-agency mortgages and preferred equity look attractive as they trade with minimal duration whilst paying an attractive yield.'
The JPM Global Income fund returned 13.64% in euro terms, over the three years to the end of January 2017. This compares with a 14.15% rise by its Citywire-assigned benchmark, the LCI BBGUS HY 2%/ MSCI WI Hdg/BBGG Ag Crd (40:35:25), over the same time period.