Investors face further uncertainty against an increasingly challenging macroeconomic backdrop during the latter half of 2019, making it difficult to know how to position properly. 
As part of an ongoing series looking at how multi-asset managers are positioning for the rest of 2019, Gareth Witcomb, investment manager of the £90.2m JP Morgan Multi-Asset Trust, explains why macro factors plays a key part in his process and what his biggest concerns are.
“We are a macro, top-down team, so we think of the world very much in terms of ‘Do you like stocks over bonds? Which regions do you like? Which bond markets do you like? Which FX markets do you like?’” he explained. “And that’s very much driven by our top-down view of the world.”
While some multi-asset managers have highlighted the US-China trade dispute as the number one issue likely to shape markets for the remainder of the year, Witcomb believes that the main worry is the Federal Reserve and interest rates.
“When we started this year, we looked at the ongoing trade issue and we had very weak PMIs in China and Europe,” he said. “[However] equity markets managed to lead something of a recovery and I think we feel that what has driven that has been this pivot from the Fed.”
Referring to the Fed’s reversing of its normalisation policy at the end of 2018 which triggered a major risk sell-off, Witcomb said that he was surprised to see the extent to which the Fed had backtracked on themselves as they confirmed at the end of July a few weeks ago that they would be cutting interest rates by 25 basis points.
“It’s really about how they frame that rate cut,” Witcomb said, “Whether they’re more concerned, and they’re seeing things on the horizon that are giving them cause for concern.”
This ‘back and forth’ on US interest rates has been a key reason for maintaining a “risk appetite” in markets and keeping it relatively high, according to the multi-asset manager.
Concerns over interest rate and Fed policy decisions are not just a result of his own thinking, Witcomb pointed out.
He explained that the JP Morgan asset allocation team is a collaborative effort built on a “very deep research function”, coming from their quantitative and qualitative research team. This is run alongside the ideas of the portfolio managers, such as himself.
“The job of the portfolio management team is not to blindly implement their views coming from here [the quantitative research teams], we have a very joined-up approach where my job is to bring my own views and challenge the views being brought to the table by the other teams,” he said.
“And really, from there, we come up with one view of the world.”
As such, concern over the Fed is equally shared among other members of the asset allocation team. But it goes further than just the US central bank.
Indeed, the European Central Bank’s (ECB) outlook has definitely changed, according to Witcomb.
“The ECB has signalled now that they think that stimulus is required,” said the JP Morgan Multi-Asset Trust manager. “When [ECB president] Mario Draghi spoke recently, he talked about the need about stimulus could be forthcoming if required. He’s now talking about it being required in the eurozone economy.”
The reason the outgoing ECB president spoke about stimulus, said Witcomb, was because of the rates of inflation, which he said are another issue for markets.
To align himself and his funds against the threat of inflation, Witcomb said that he has been adding duration to the portfolio.
“We don’t own physical fixed income or government bonds [in the trust] but what we do have is some duration via futures,” he said. “That duration is really focused now in the US, where yields are relatively high compared to other parts of the world.”
This he added was also cushioning against any further rate cuts that the Feds might implement later.
“We are positive on duration,” Witcomb said, “but given the extent to which central bank’s action has been priced-in, we can move to a more neutral stance to duration.”
When talking about neutral positioning, the manager clarified that he was talking about relative to a strategic allocation as they may see more opportunities in the latter part of 2019 and could move to a more overweight position.
One factor which cannot be ignored in discussions surrounding the issue of interest policy is the US-China trade war, as the manager believes the two are directly linked.
With the burgeoning trade war causing disruption to global supply chains, it is creating a huge ‘unknown’ in the global economy, according to Witcomb.
This ‘unknown’, said the manager, is partly why we there has been such a ‘back and forth’ reaction from the Fed, “because they don’t want to be behind the curve and they clearly think this is something that’s a risk”.
The global economic backdrop, said Witcomb, “tells you something about the way central banks think”.
“The consumer can continue to expand the economy can continue to rotate. But underneath that, if you look a bit deeper, there is this kind of looming pitch of concern.
“I think the way that we would frame the macro picture is that you have, on the one hand some macroeconomic indicators which are looking concerning – PMIs in Europe, for example. Some of the industrial data out of the US. China as well is slowing.
“Then, on the other hand, you have this huge liquidity injection coming from central banks, and it’s really [all about] how do those two dynamics play out?”
He added: “The other thing in the middle is how US earnings play out. It’s been a bit mixed [in Q2], if we’re honest. I don’t think there’s been a huge disappointment, but certainly it’s made companies pretty cautious on forward guidance.”
Whitcomb concluded: “That’s why we kind of remain relatively defensive, I think it’s going to need further multiple expansion, or a very quick resolution of the trade feature for equities to make further progress.”
The JP Morgan Multi-Asset Trust targets income generation and capital growth while also seeking to maintain lower levels of volatility than a traditional equity portfolio.
Performance of trust vs sector & benchmark since launch
Source: FE Analytics
Since launch in March 2018, the trust has made a loss of 0.69 per cent compared with a gain of 3.85 per cent for the average IT Flexible Investment peer and a 7.77 per cent gain for the Libor GBP 1 Month + 4.5 per cent benchmark.
According to the Association of Investment Companies, the trust is currently trading at a discount to net asset value (NAV) of 10.9 per cent, is not geared, has a yield of 4.3 per cent and ongoing charges of 1.07 per cent.