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JP Morgan: How to play today’s five biggest macro trends

19 July 2015

JP Morgan’s Talib Sheikh tells FE Trustnet the biggest economic headwinds and tailwinds across the globe at the moment, and how investors can optimise returns by playing them.

By Lauren Mason,

Reporter, FE Trustnet

Relying on traditional markets and maintaining a diversified portfolio is no longer enough to provide reliable returns, according to JP Morgan’s Talib Sheikh (pictured).

The multi-asset portfolio manager believes that a long-only beta investment technique should be ditched in favour of a more sophisticated top-down technique that will allow a portfolio to outperform regardless of market conditions.

In view of this, Sheikh gives Trustnet the five biggest macro stories at the moment, and how he is adapting his tactics to play them.


Europe's Growth Recovery

Following the continuation of quantitative easing (QE) from the European Central Bank (ECB), Sheikh says that credit conditions are improving and growth is gradually returning to Europe.

What’s more, he believes that when Greece stabilises, a combination of the weaker euro, an upswing in the credit cycle and a boost in investor and consumer confidence within the eurozone will act as a significant tailwind to Europe’s economy, therefore driving risk assets in the region higher.

While Sheikh believes that any potential fallout that could still occur from a Grexit would be contained if it were to happen, he has trimmed his allocation to Europe as a result of the uncertainty surrounding the debt-ridden country.

Nevertheless, the manager is still confident on European equities which have – despite the recent volatility surrounding Greece – outperformed global markets this year.

Performance of indices in 2015

 

Source: FE Analytics

Despite many eurozone members having approved the Greek deal involving new austerity measures, there are a number of hurdles that need to be overcome before the country’s third bailout package can be finalised.

“Price action has been sanguine because the backstops from the ECB are credible and contagion is not a major concern,” he said.

“Meanwhile, the portfolio [of the JPM Multi-Asset Macro fund] has actually benefited from some of the near-term volatility in Europe through its long Europe versus short US variance swap, a trade which allows investors to bet on the volatility of one market relative to another market.”

 

Slow emerging market growth

It’s common knowledge that investors have been bearish on emerging markets recently, following concerns over the potential impact of an interest rate hike from the Federal Reserve.

What’s more, the impact of China’s recent market sell-off remains relatively unknown which is unsettling market sentiment further. Russia’s slide further into the depths of recession and Brazil’s shrinking economy could also be reasons for investors to turn pale on the region as well.

“Unfavourable global conditions and fading credit booms are forcing slower emerging markets growth and external rebalancing, making this an area of concern overall,” Sheikh said.

 

“Emerging markets assets are under-owned and relatively inexpensive, but until there is greater evidence of structural reform – or assets are at truly discounted levels – we would remain wary.”

At the moment, the multi-asset manager is underweight emerging market equities by 4.9 per cent compared to JPM Multi-Asset Macro’s ICE 1 Month GBP LIBOR benchmark, and he is in the process of shorting emerging market equities.

Sheikh is also steering clear other areas of the market that could be affected by the headwinds facing emerging markets, for instance the Aussie dollar, which he explains is reliant on declining commodities demand from a slowing Chinese economy.

The manager is also shorting emerging market currencies such as the South African Rand and the Korean Won in favour of the US dollar.


 Performance of indices in 2015

Source: FE Analytics

 

Japan’s economic recovery

Following a period of market stagnation in the 1990s after the collapse of the Japanese asset price bubble, the country ran substantial budget deficits and undertook a structural reform in an attempt to boost growth.

However, this led to bouts of deflation in the late 1990s and early 2000s, leaving the economy somewhat lacklustre.

However, when Japanese Prime Minister Shinzo Abe was re-elected in a landslide victory in 2012, he introduced Abenomics, a collection of economic policies that consists of three ‘arrows’ – structural reform, quantitative easing and fiscal stimulus.

Since then, consumption in the region has been steadily recovering and the economy is showing signs of sustainable strength, according to Sheikh.

“Japanese exporters are attractively valued and gain operational leverage due to the devaluing currency, so are poised to higher profitability,” he said.

“I am also long Japanese real estate stocks, which should benefit from the domestic policy focused on reflation.”

 

US Economic Strength

As oil prices stay relatively low, US consumers remain better-off and continue to spend. Meanwhile, US employment is also recovering and corporate balance sheets are strong.

However, many investors argue that valuations in the region are stretched, and that the economy’s six-year bull-run will inevitably undergo a correction. In fact, since the start of the year, the S&P 500 index has lagged behind other indices across the globe including the MSCI World and the FTSE All Share, to deliver a return of 3.98 per cent.

 

Performance of indices in 2015

Source: FE Analytics

Sheikh says the front of the US yield curve is probably overvalued due to his belief that the Federal Reserve will begin hiking rates this year.

However, he believes that any volatility the rate hike will cause will be fleeting, and that the focus should be on the US’s improved growth prospects that are causing the Fed to tighten in the first place.

“I’m sanguine on prospects for US equities to continue their six year bull market and have been holding onto exposure, in part through a long US dollar position,” the manager explained.

“Perhaps in contrast to other fund managers, I don’t see the pending US Fed interest rate hike as a reason to take my chips off the table in the US.”

Sheikh is particularly keen on sectors in the region that have benefitted from M&A activity, such as technology, financial and healthcare.


 Global policy divergence

On a broader scale, economies around the world are showing varying signs of recovery since the financial crisis of 2008 due to varying regional policy responses.

For example, the Bank of Japan and the European Central Bank are embarking on aggressive quantitative easing programmes to expand balance sheets, while the likes of the US and UK are have stopped their stimulus packages and are even planning on raising interest rates before the end of the year.

However, this has arguably meant that investors have to navigate a ‘fork’ in global monetary policy as some economies are recovering well and while others continue to slump, which could increase volatility. 

To play this, Sheikh is long in European equities, which he believes will benefit from quantitative easing.

“[My play on global policy divergence] is also reflected in my short on emerging market equities, which are likely to suffer from tightening US monetary policy, which may in effect pull capital out of emerging markets,” he said.

“I am long the US dollars as a reflection of this theme, which I think is strengthened by improving internal and external balances.”

Since its launch in February 2013, Sheikh’s JPM Multi-Asset Macro fund has returned 28.4 per cent, meaning it has outperformed both UK equities and bonds over that time. It has also had a lower maximum drawdown – which measures the most an investor would have lost if they bought and sold at the worst possible times – since inception.

Performance of fund versus indices since launch

 

Source: FE Analytics

The £9.3m fund has a clean ongoing charges figure (OCF) of 1.68 per cent.
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