Insight articles
Emerging Markets: Value awaiting momentum
George Iwanicki, EM Macro Strategist, Global Emerging Markets Equity
February 2012
For emerging market equities, as for many other asset classes, the current situation can best be described as value awaiting momentum. Emerging market equities are cheap, but the catalyst to unlock this value broadly across the asset class has yet to materialise. In this paper, George Iwanicki, emerging market macro strategist, discusses the global backdrop and looks at how it relates to emerging markets. He then considers a special topic within the asset class, that of overinvestment, using Brazil and China as case studies.
Asia-Pacific markets in the Year of the Dragon
Ted Pulling, Head of the Pacific Regional Group, Hong Kong
January 2012
As we move into the Chinese New Year, Ted Pulling, the new head of our Pacific Regional Group, takes a look back at 2011 and gives his views on what may lie ahead for investors in the Year of the Dragon.
Emerging market debt outlook
By Pierre-Yves Bareau, Head of Emerging Market Debt
January 2012
Emerging market debt was one of the best-performing asset classes of 2011, despite succumbing to the global risk aversion of the fourth quarter. In this paper, Pierre-Yves Bareau assesses the outlook for the asset class overall in 2012, examining the risks and highlighting the attractive valuations that have resulted from the fourth-quarter sell-off. He also looks at the individual outlooks for each of the three main sub-asset classes – external sovereign debt, local currency debt and corporate debt – and identifies the markets and sectors that offer the best prospects in the year ahead.
The price of inflation
By Paul Sweeting, European Head, Strategy Group and Dan Morris, Global Strategist
December 2011
Even as the UK economy struggles under the weight of the government’s austerity programme and weak global growth, inflation has remained stubbornly high. Despite numerous predictions from the Bank of England (BOE) that rates would soon fall back towards the target rate of 2%, headline inflation is currently closer to 5% and most economists do not forecast it reaching the BOE’s target again until 2013.
The normal reaction of a central bank to high inflation is to raise policy rates. To understand why the BOE has not, and to evaluate how large a threat inflation (or even deflation) is to the UK economy, we must look at how inflation is calculated, what it represents, and where it comes from.
Global bond outlook: Full circle, but which direction?
By Nick Gartside, Fixed Income CIO
December 2011
Low levels of economic growth and high levels of debt are creating significant opportunities in global bond markets. J.P. Morgan Asset Management’s international chief investment officer for fixed income, Nick Gartside, explains how the global economy has come full circle and why global bonds may continue to provide investors with attractive returns in the coming years.
Review of the year and outlook for 2012
By Dan Morris and Tom Elliott, Global Strategists
December 2011
Investors have had a difficult year. With stubbornly high inflation to contend with in the eurozone, the UK and the US, weak macroeconomic data and a rise in market volatility, achieving a real return on capital has been a challenge. Stock markets have fallen around the world and yields have risen in many credit and government bond markets.
Global Strategists Dan Morris and Tom Elliott examine the themes behind the fall in growth expectations in 2011, and explore the outlook for 2012.
Long-term Capital Market Assumptions: 2012 estimates and the thinking behind the numbers
By J.P. Morgan Asset Management Assumptions Committee
November 2011
Long-term Capital Market Return Assumptions are developed each year by our Assumptions Committee, a multi-asset class team of senior investors from across the firm. The Committee relies on the input and expertise of a range of portfolio managers and product specialists, striving to ensure that the analysis is consistent across asset classes. The final step in the process is a rigorous review of the proposed assumptions and their underlying rationale with the senior management of J.P. Morgan Asset Management.
Our capital market assumptions are used widely by investors—including pension plans, insurance companies, endowments and foundations—to ensure that investment policies and decisions are based on real-world, consistent views and can be tested under a variety of market scenarios.
Asian Bonds: quality and value in a low interest rate world
November 2011
With interest rates at historic lows across much of the developed world, and with many western government bond markets offering little long-term value at current valuation levels, investors are increasingly looking to Asia’s attractive local currency bond markets. In this paper, we look at two key factors that investors should consider when assessing whether to invest in Asian bonds.
The Euro crisis: Origins, solutions and investor options
November 2011
While there is good news that the eurozone sovereign debt crisis is not due to a lack of money within the eurozone, debt concerns continue to undermine global equities. Furthermore, time is not on policymakers’ side. There is a growing sense of crisis with rising bond yields in core eurozone countries that have not been associated with debt problems until now and uncertainty continuing to push up borrowing costs for Italy and Spain to dangerous levels. How do we manage this? We look at two options which may be implemented separately or combined.
Twelve in 2012: What politics could mean for markets in the year ahead
November 2011
2011 has been extraordinary in a number of respects, including the influence of politics on financial markets. Who could have ever imagined that domestic inter-party conflicts in countries such as Belgium or Slovakia could dominate global markets and investor sentiment? That revolutions would erupt across North Africa and the Middle East, taking Brent crude over USD 125/barrel? That the US would lose its AAA sovereign rating partly on the back of domestic political infighting, spurring gold prices above USD 1,900/ounce?
The coming year seems unlikely to be much different.
Striking a new chord: HARP 2.0 and the US housing market
November 2011
Recently there has been a push for the US government to provide additional assistance to borrowers who have been unable to refinance at lower interest rates. HARP was designed to allow owner occupied borrowers, who met certain conditions. Although HARP has helped a number of high LTV and credit impaired borrowers take advantage of lower interest rates and/or improve the long-term stability of their mortgage, it has fallen well short of its intended goals. The Columbus fixed income team explore the issue in this piece.
Global Convertibles: Opportunities for uncertain times
November 2011
In this investment insight Antony Vallee and Robin Dunmall, members of the dedicated convertibles team with our Global Multi-Asset Group, examine the performance of global convertibles over the turbulent summer of 2011, analyse current valuations in the convertibles market following the equity market selloff, and then consider the outlook for the asset class against an uncertain macroeconomic backdrop.
2011 Market Pulse – European views on fixed income
November 2011
Institutional investors are faced with an unprecedented convergence of factors affecting their fixed income strategies – including economic slowdown, inflationary pressures, low real returns and sovereign default risk. In this paper, we have built a comprehensive picture of current attitudes in Europe towards an asset class that has long been the foundation of institutional investment.
Dividends: for both income and total return growth
October 2011
High dividend paying stocks offer two things to the investor: a source of income that currently exceeds that available from US, UK and core-eurozone government bond markets, and, secondly, a valuable source of total return in an environment of uncertain capital growth. Longer term, it is through the reinvestment of dividends that value tends to outperform growth stocks. When investing for dividends, it is important to think globally to maximise the opportunity set of the most useful of stocks: those with both a high yield and an increasing dividend.
Emerging markets strategy: Can emerging markets do it again?
October 2011
With renewed recession fears in the developed world, emerging market macro strategist George Iwanicki asks whether emerging markets can help lead the world through another tumultuous period. To answer this question, George re-examines the decoupling story and the consequences for commodity prices of an extended zero interest rate policy, and also focuses on some of the tactical views that have become exciting within the emerging markets asset class.
Using correlations in asset allocation
September 2011
Correlation tables have their limitations, and an understanding of these is important to avoid investment errors. This paper looks at two aspects of correlation tables that, in conversations with clients, have caused the most misunderstanding.
The overriding message is to use correlations carefully. Understand the methodology used, know the volatility of a correlation as well as its value at any one time, and perhaps assume a stronger correlation than that produced by the maths to take into account certain asymmetries.
Is Asia decoupling from the west?
September 2011
An escalation in the eurozone sovereign debt crisis and a string of weak economic reports from the US has caused increased volatility in markets in recent weeks. Although markets have been affected globally, our Asian investment team believes investors should be encouraged to see indications that Asia’s economy is decoupling from the west.
A soft patch, not a perfect storm
August 2011
Investor fear has resulted in heavy losses in global equity markets in recent weeks, pushing risk appetite indicators to extreme lows. Katherine Santiago evaluates the drivers of the market falls, assesses the economic backdrop and looks at the implications for portfolio construction.
Eurozone crisis: the latest developments
August 2011
The eurozone summit in late July was meant to bring an end to the peripheral debt crisis and stop contagion from spreading to Spain and Italy. The package of measures announced at the summit, including a further EUR 140 billion in aid for Greece and enhanced powers for the European Financial Stability Facility (Europe’s bailout fund), were initially greeted positively by investors. However, renewed market instability at the beginning of August reflects concerns that the package does not go far enough.
US Debt crisis: What now?
August 2011
The deal to raise the debt ceiling, signed into law on 2 August, allowed the US to avoid default. However, the fiscal tightening announced was not sufficient to satisfy Standard & Poor’s, with the US losing its AAA credit rating on 5 August. What will be the consequences of the downgrade for markets? This paper discusses the impact of the US debt crisis and credit rating downgrade on the outlook for markets and for the economy.
What’s behind this week’s volatility
August 2011
The root cause of the current market sell off is the continued deleveraging of governments,
households and banks that began with the credit crunch. This has escalated due to
fears that US/global growth is stalling.
This week’s market falls reflect a greater recognition of the deleveraging problem
following the end of QE2 in June and the renewed sovereign debt issues in the eurozone
and US, which have been accentuated by thin August trading.
ETFs: Weighing the risks
July 2011
The dramatic growth in exchange traded funds (ETFs) has led regulators to consider more carefully the systemic risks ETFs may pose. Several organisations have published papers recently highlighting their concerns and calling for further study (see list at end of article). We offer here a summary of these reports.
Strategic bond investing: Solutions for a new bond world
June 2011
The bond world has been turned upside down. Developed world government bonds, for so long the staples of most bond portfolios, appear to offer little long-term value at current levels, under pressure from high inflation and rising interest rate expectations. In contrast, emerging market debt and high yield bonds, which have traditionally played a more marginal role in most portfolios, are increasingly providing the driving force behind bond returns.
In this paper Nicholas Gartside, international chief investment officer for global fixed income at J.P. Morgan Asset Management, provides an overview of the current macroeconomic environment, explains how the dynamics of the global bond market have changed over recent years, and suggests how investors can position themselves to benefit in this new bond world.
European equities: A long-term perspective
June 2011
European equities have outperformed the rest of the world over the long term, thanks
to the innovative products produced by the region’s dynamic corporate sector.
In this paper, Stephen Macklow-Smith applies a long-term perspective to European
equity investing, looking at the unique factors that have powered the region’s outperformance.
He also assesses earnings growth and valuations, and discusses the themes currently
shaping the markets.
Emerging markets strategy: Evaluating inflation and commodities
June 2011
With the recent momentum in earnings estimates for developed markets now appearing to have come to an end, George Iwanicki, emerging market macro strategist, examines the value story for the emerging markets asset class against the current global cyclical backdrop and re-caps on the inflation issues that have occupied investors over recent months. In the context of the commodity volatility experienced over the last few months, George also digs deeper into the commodity-currency nexus and examines how a super cycle in commodities is interplayed with currencies.
Japan’s debt trap: Who’s in the trap? Disentangling the public finance puzzle and its interaction with the JGB market
June 2011
The cost of rebuilding following the earthquake and tsunami in Japan in March, and renewed concerns about the ability of Greece to repay its debt, have turned the attention of investors once again to the debt burden in Japan. Yoshi Sakakibara, Economist, and Dan Morris, Market Strategist, discuss the current fiscal situation in Japan and the potential impact of financing the reconstruction.