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  • MARKET INSIGHTS UK | Q2 2017

    Portfolio Discussions Considering trends and opportunities for investors with Guide to the Markets

    jpmorgan.am/portfolio-discussions

    CONTENTS

    Global macro investing 2

    Investing in Europe 8

    Flexible fixed income 14

    Investing in the UK 20

    Investing in the US 26

  • GLOBAL MACRO INVESTING

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    2 PORTFOLIO DISCUSSIONS – UK | Q2 2017

    Global macro investing

    Themes and trends in the global economy are the biggest driver of asset price returns. Global macro investing seeks to take

    advantage of these changes by delineating macroeconomic thinking into a set of themes or trends and assigning certain levels

    of probability as to how these will evolve through time. To efficiently reflect macro themes in a portfolio, investors must draw on

    a broad set of asset classes. Macro investing typically aims to generate positive returns in different market environments, with a

    lower level of volatility than equities to limit falls in periods of market stress and achieve a smoother path of portfolio growth.

    Aim for positive risk-adjusted returns

    • Risk-adjusted returns for a traditional balanced equity and bond portfolio have been very strong over the last few years.

    • As we get closer to the end of this economic cycle, returns from traditional assets are likely to fall and volatility is likely to rise, meaning risk-adjusted returns could be lower. In this environment, it probably makes sense to seek exposure to a mix of assets that can provide a lower volatility than equities but that can still deliver attractive positive returns.

    • Investors should not rely solely on a negative correlation between stocks and bonds for diversification as this relationship cannot always be relied on when it is needed most, such as in August 2015.

    • Funds that can use sophisticated strategies, such as options and shorting, have the potential to protect against portfolio downside and can aim to make money without simply relying on equities or bonds rising in value.

  • Global m acro

    investing

    J .P. MORGAN ASSET MANAGEMENT 3

    74

    GTM – UK |

    -1.5

    -1.0

    -0.5

    0.0

    0.5

    1.0

    1.5

    2.0

    2.5

    3.0

    3.5

    '04 '06 '08 '10 '12 '14 '16

    1.3

    -1.1

    0.5 0.4

    3.0

    -3.8

    1.0

    -0.8

    -4

    -2

    0

    2

    4

    Risk-adjusted returns and downside protection

    Risk-adjusted returns of a 50/50 portfolio Sharpe ratio of a portfolio of 50% global equities and 50% global bonds*

    Six-month stock and bond correlations Of total return on US equities (S&P 500) and US Treasuries (10-yr)

    Hedge fund returns in different market environments %, average total return in up and down months, 2001-2016

    Source: (Left) MSCI, J.P. Morgan Asset Management. *The equity index is the MSCI World (EUR hedged) and the bond index is the JP Morgan Global Bond index (EUR hedged). The portfolio is rebalanced monthly. Sharpe ratio is calculated as (Return - Risk free rate) / Volatility. (Top right) Bloomberg, J.P. Morgan Asset Management. (Bottom right) Barclays, Thomson Reuters Datastream, Hedge Fund Research, Standard & Poor’s, J.P. Morgan Asset Management. **HFRI FW is Hedge Fund Research Index Fund Weighted. ***US bonds is the Barclays US Aggregate Bond Index. Downside protection refers to attempting to minimise the impact of any falls in the underlying investments. Guide to the Markets - UK. Data as of 31 March 2017.

    HFRI FW** US bonds***

    HFRI FW** S&P 500

    5-year Sharpe ratio

    3-year Sharpe ratio

    S&P 500 up S&P 500 down Bond downBond up

    O th

    er a

    ss et

    s

    74

    -1

    0

    1

    '91 '96 '01 '06 '11 '16

  • GLOBAL MACRO INVESTING

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    4 PORTFOLIO DISCUSSIONS – UK | Q2 2017

    Go beyond traditional multi-asset investing

    • Global macro investing is about assigning probabilities to potential outcomes of trends as they evolve, and understanding the implications for asset classes.

    • Macro investing should be highly dynamic, with the ability to move exposures quickly as trends change or surprise events unfold. Macro-driven portfolios often draw on a very broad opportunity set across many asset classes.

    • This multi-asset, unconstrained investment style moves away from traditional equity funds that tend to underweight their least preferred regions or sectors. Instead, a macro portfolio only has exposure to investments and strategies that it expects to make positive returns.

    • As well as having the ability to use long equity and fixed income strategies to generate positive returns, macro investing can also exploit relative value opportunities. For example, global macro investing can benefit from the expectation that one currency will outperform another based on a prevailing economic theme.

  • Global m acro

    investing

    J .P. MORGAN ASSET MANAGEMENT 5

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    Asset class returns (GBP)

    Source: Barclays, Bloomberg, FactSet, FTSE, MSCI, J.P. Morgan Economic Research, J.P. Morgan Asset Management. Annualised return covers the period from 2007 to 2016. Vol. is the standard deviation of annual returns. Govt bonds: Barclays Global Aggregate Government Treasuries; HY bonds: Barclays Global High Yield; EMD: JP Morgan EMBI+; IG bonds: Barclays Global Aggregate – Corporates; Cmdty: Bloomberg UBS Commodity; REITS: FTSE NAREIT All REITS; DM Equities: MSCI World; EME: MSCI EM; Hedge funds: Credit Suisse/Tremont Hedge Fund; Cash: JP Morgan Cash United Kingdom (3M). Hypothetical portfolio (for illustrative purposes only and should not be taken as a recommendation): 30% DM equities; 10% EM equities; 15% IG bonds; 12.5% government bonds; 7.5% HY bonds; 5% EMD; 5% commodities; 5% cash; 5% REITS and 5% hedge funds. Returns are unhedged, total return, in GBP. Guide to the Markets - UK. Data as of 31 March 2017.

    GTM – UK | In

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    pr in

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    es

    20102007 20122008 2011 20162009 2013 2014 2015 10-yr ann. Vol.Q117

    84

    EME 37.5%

    Govt bonds 52.6%

    EME 59.4%

    REITS 31.6%

    EMD 10.0%

    REITS 14.9%

    DM Equities 25.0%

    REITS 35.1%

    REITS 8.2%

    HY bonds 36.3%

    EME 9.8%

    HY bonds 12.4%

    EME 25.5%

    Cmdty 14.7%

    IG bonds 26.5%

    HY bonds 41.9%

    EME 22.9%

    REITS 8.1%

    HY bonds 14.4%

    Hedge Funds 9.6%

    EMD 12.8%

    EMD 7.7%

    Cmdty 32.9%

    DM Equities 4.6%

    EMD 11.6%

    REITS 16.8%

    Hedge Funds 12.6%

    EMD 25.0%

    Hedge Funds 18.4%

    Cmdty 20.5%

    Govt bonds 7.1%

    EME 13.4%

    Portfolio 6.0%

    DM Equities 12.1%

    DM Equities 5.5%

    EMD 30.8%

    Portfolio 2.8%

    REITS 9.6%

    Govt bonds 16.1%

    Portfolio 8.9%

    Cash 6.9%

    Portfolio 16.5%

    HY bonds 18.4%

    IG bonds 5.1%

    EMD 12.9%

    HY bonds 5.3%

    IG bonds 9.6%

    HY bonds 2.9%

    REITS 30.4%

    EMD 2.5%

    DM Equities 9.0%

    Cmdty 16.0%

    Govt bonds 8.7%

    Portfolio 1.3%

    DM Equities 16.4%

    DM Equities 15.9%

    HY bonds 3.9%

    DM Equities 11.4%

    REITS 1.3%

    Portfolio 8.7%

    Govt bonds 2.3%

    EME 29.5%

    Hedge Funds 2.5%

    IG bonds 8.9%

    HY bonds 13.8%

    DM Equities 7.7%

    HY bonds 1.2%

    REITS 13.5%

    EMD 15.3%

    Cash 1.2%

    Portfolio 8.0%

    Cash 0.5%

    HY bonds 6.2%

    IG bonds 2.0%

    DM Equities 25.6%

    HY bonds 2.0%

    Portfolio 8.7%

    DM Equities 11.9%

    Cash 6.1%

    Cmdty -12.5%

    EMD 12.1%

    Portfolio 14.9%

    Portfolio -0.9%

    Hedge Funds 7.5%

    IG bonds -1.5%

    Govt bonds 5.4%

    Portfolio 1.3%

    IG bonds 24.4%

    REITS 1.7%

    Govt bonds 7.8%

    EMD 10.3%

    IG bonds 4.9%

    REITS -13.2%

    Cmdty 7.3%

    Hedge Funds 10.6%

    Hedge Funds -2.9%

    IG bonds 6.3%

    EME -4.1%

    EME 4.3%

    Cash 0.7%

    Portfolio 24.4%

    Govt bonds 0.9%

    EME 6.7%

    Hedge Funds 9.4%

    EMD 4.7%

    DM Equities -17.4%

    IG bonds 6.1%

    Govt bonds 9.2%

    DM Equities -4.3%

    Cash 1.4%

    Govt bonds -6.1%

    Hedge Funds 4.1%

    Hedge Funds -0.8%

    Govt bonds 21.3%

    IG bonds 0.4%

    Hedge Funds 3.5%

    IG bonds 8.6%

    HY bonds 1.4%

    Hedge Funds -18.3%

    Cash 2.2%

    IG bonds 9.2%

    Cmdty -12.7%

    Govt bonds -2.6%

    EMD -10.0%

    Cash 0.6%

    EME -9.7%

    Cash 0.7%

    Cash 0.1%

    Cash 2.1%

    Portfolio 7.3%

    REITS -19.2%

    EME -35.2%

    Govt bonds -8.6%

    Cash 1.0%

    EME -17.6%

    Cmdty -5.4%

    Cmdty -11.2%

    Cmdty -11.8%

    Cmdty -20.3%

    Hedge Funds -1.1%

    Cmdty -3.6%

    Cmdty -1.2%

    Cash 2.2%

  • GLOBAL MACRO INVESTING

    Gl

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