Equities offer more buffer as bond yields likely to rise

Parking funds in shares should give investors more protection than other asset classes, given an anticipated rise in bond yields in coming months, said JP Morgan Asset Management (JPMAM).

The asset manager attributed the brighter outlook for equities partly to the positive corporate earnings momentum on the back of stronger global economic growth.

"While we expect higher positive equity returns... it's possible that we will get a technical correction in the third quarter, before moving higher again," noted JPMAM global market strategist Jasslyn Yeo.

She sees fundamentals supporting equities as economic growth is still running above trend for most major developed and emerging markets. "The risks of a recession remain low over the next 12 months," noted Dr Yeo in the firm's third-quarter investment outlook briefing yesterday.

The JP Morgan unit is cautious on British shares owing to uncertainties around Brexit, but it favours Europe, Japan and Asia ex-Japan over stocks listed in the United States.

Dr Yeo said: "On the overall index level, we see limited upside on the S&P 500, given the challenging valuations, but we want to be selective in this market."

Investment opportunities include US banks, which are expected to benefit from the higher interest rates and bond yields, as well as potential financial de-regulation. US technology and healthcare stocks are also longer-term growth plays.

Financial counters in Europe and Asia ex-Japan are also tipped to perform better. Dr Yeo prefers markets like China, South Korea, India, Thailand and Indonesia, with an "underweight" call on Singapore shares.

"Within the Asean context, we see more opportunities and value outside of Singapore... That being said, we are overweight on sectors like banks and real estate developers."

In view of rising bond yields, JPMAM is cautious over fixed-income where "increasingly frothy valuations could turn into headwinds for further gains" in this quarter.

A version of this article appeared in the print edition of The Straits Times on July 24, 2017, with the headline 'Equities offer more buffer as bond yields likely to rise'. Print Edition | Subscribe