Fund managers interview series

'Equities expected to outperform bonds'

Dr Jasslyn Yeo, who has more than 10 years of experience in asset allocation, investment strategy and portfolio management, sees "the broadening growth upturn translating into earnings growth, the latter being a key driver of equity returns".
Dr Jasslyn Yeo, who has more than 10 years of experience in asset allocation, investment strategy and portfolio management, sees "the broadening growth upturn translating into earnings growth, the latter being a key driver of equity returns".ST PHOTO: KELVIN CHNG

In our monthly series featuring fund managers and leading market experts, we ask JP Morgan Asset Management's global market strategist Jasslyn Yeo about her investment philosophy and strategies.

Dr Jasslyn Yeo is part of the global market insights strategy team responsible for formulating and communicating the market outlook and investment views in the Asia region.

She has more than 10 years of experience in asset allocation, investment strategy and portfolio management, and has a PhD in financial economics from the University of Western Australia.

JP Morgan Asset Management offers global investment management solutions to both retail and institutional investors here and in South-east Asia, spanning a wide range of asset classes. Its range of funds includes the JPMorgan Investment Funds-Global Income Fund, JPMorgan Investment Funds-Global Macro Opportunities Fund and JPMorgan Funds-Asia Pacific Income Fund.

Q The global economy has picked up this year. Do you expect this to continue?

A The global growth recovery looks set to broaden out and continue, driven by a capital expenditure revival as business confidence picks up. The US economy may be in late cycle, but growth momentum can persist for some time. Progress on US tax reform and deregulation would also help to extend the cycle.

The rest of the world - the euro zone, Japan and emerging markets - are in less mature cycles and are expected to deliver above-trend growth over the next 12 months.

Inflationary pressures remain benign, with major central banks moving towards monetary normalisation at a gradual pace. Overall, financial conditions remain accommodative and supportive of growth, and the risks of a recession remain low.

Q What is your investment strategy as interest rates continue to rise?

A We expect equities to outperform fixed income in today's gradual rising rate environment. We see the broadening growth upturn translating into earnings growth, the latter being a key driver of equity returns.

Conversely, we take a more cautious stance on fixed income, as bonds offer less of a buffer against higher rates. We remain negative on government bonds and neutral on corporate bonds, but with a preference for high yield over investment-grade corporate bonds. This is more a coupon-clipping story, as credit spreads are already trading at relatively tight levels.

Given current high valuation and low volatility levels, we see an increased probability of lower expected asset returns and higher volatility for our investment portfolios over a medium-term horizon. Therefore, we also recommend adding liquid alternatives (for example, relative value and hedging strategies), in order to enhance the overall risk-return mix.

Q Stock markets have risen sharply this year. Do you think valuations are too high?

A Relative to their own history, equity valuations do look rather high. Relative to bonds, however, equity valuations remain attractive.

It is important to recognise that equity risk premiums are still relatively wide, which suggests that valuations can stay at relatively high levels even as bond yields grind higher.

We remain comfortable with our preference for equities over bonds, so long as companies continue to deliver strong earnings growth and interest rates/bond yields rise at a slow and steady pace.

Q Which equity markets do you prefer?

A We are currently diversifying our equity exposure across the various major geographical regions of the US, euro zone, Japan and emerging markets.

At this juncture, we believe that it pays to be diversified, given that equity market correlations have fallen significantly.

We point out that while US equities may trade at stretched valuations and look less attractive from a medium-term perspective, they can still perform well in the near term. US earnings growth remains strong and there may potentially be an added boost coming from US corporate tax cuts.

On sectors, we tactically prefer cyclical sectors (in particular, technology, financials, and selected commodities and industrials) over defensive sectors at least for the early part of next year, playing into the global growth recovery and rise in bond yields.

Q Where do you see the US dollar next year, especially against the Singapore dollar?

A We expect the US dollar to largely consolidate next year, with risks to the upside. Markets will likely need to re-price in more rate hikes from the Fed as inflation picks up and potential US tax reform builds expectations for a more hawkish Fed, which is dollar-supportive.

Additionally, US corporates may repatriate some of their non-US-dollar-denominated foreign earnings back to the US, providing some support for the dollar as well.

On US dollar/Singdollar, we believe we have seen a near-term bottom in September, and we generally would expect some Singdollar weakness versus the US dollar next year.

Q Do you think investors should still consider bonds/fixed income in their portfolios?

A It is important for investors to still hold bonds/fixed income in their portfolios even as interest rates rise.

While bonds may underperform equities in this environment, they do provide a natural hedge for the portfolio, given that bond and equity returns are typically negatively correlated. Bonds can also provide a stream of regular coupon payments for investors who need a steady and predictable flow of income.

Q What is your investment advice for the Asian investor next year?

A Be pro-risk, but be selective and watch your downside.

A pro-risk tilt towards equities in your investment portfolio makes sense in today's positive macro environment.

But given that valuations are no longer trading cheaply, investors should be increasingly selective on what they hold in their portfolio and be mindful of the risks they are taking.

Again, we would ask investors to consider having more liquid alternatives in their portfolios.

Q What keeps you awake at night?

A Grey rhinos. I think it is pointless worrying about black swans when they are random and unpredictable.

Q If I am not an investment strategist, I would be...

A A real estate developer like my dad.

A version of this article appeared in the print edition of The Sunday Times on December 10, 2017, with the headline ' 'Equities expected to outperform bonds''. Print Edition | Subscribe