Following the news that the Fed will not be tapering their quantitative easing programme, some industry experts such as Gervais Williams and Trevor Greetham have said that higher beta areas such as emerging markets could spike in the short term.
They say that as investors realise that the as Fed’s wall of money will continue for the time being, previously unloved areas could well rally as investors look to deploy their capital into cheaper equities.
They also suggest a continuation of the Fed’s money printing could cause the dollar to weaken in the short term, which would help the developing world.
However Mayell, who is a managing director of portfolio management at the firm and client portfolio manager on the JPM Multi Asset Income fund, disagrees, and says it will be very difficult to time the market.
“We struggle to see a reason to put money in emerging markets at the moment,” she said.
“Emerging markets have lagged but they could squeeze up over the short term. However, from a medium term perspective we are staying with developed market equities.”
“We will remain underweight until the dispersion of valuations between emerging and developed market equities widens.”
Emerging market equities have largely disappointed recently, with issues such as a slowdown in China, falling commodity prices and a stronger dollar all taking their toll.
According to FE Analytics, the MSCI Emerging Markets index has returned 1.52 per cent over three years, more than 30 percentage points less than the FTSE All Share and 50 percentage points less than the S&P 500.
Performance of indices over 3yrs
Source: FE Analytics
However, Mayell says that emerging markets are likely to fall even further from here over the medium term as investors revaluate their portfolio positioning when central bank monetary policy eventually normalises.
“I would agree and I think it is realistic that emerging markets bounce back in the short term, but as emerging market currencies are likely to weaken then we would dispute whether it is a sustainable trend, ” she said.
“When you are running institutional money it is very difficult to make short term moves and so we are pretty confident that developed markets are the place to put your money for the medium term.”
“That really is on valuations. You can make a case that the risk/reward of developed markets are higher as there is still a lot of upside available and they offer more stability,” she added.
Mayell says this view on asset allocation is followed by the JPM Multi Asset Income fund. She says the fund is instead adding positions in European dividend paying equities.
She says that this is because it is a way of playing the strength of the corporate recovery in Europe and the expectation that shareholders benefit from record cash on balance sheets.
“We have had the view for some time that an investor’s best bet has been developed market equities,” she said. “Because of that, we have had high weightings to the US and Europe but they both form part of a globally diversified portfolio.”
“However, there have been two things that we have found appealing about Europe in particular. The bottom up fundamentals are now strong so we have increased our allocation to high yielding European equities, which is a very specific bet.”
“The second part is that our in-house European team have been able to respond to the value and momentum by investing in top quality companies.”
“We have had the view for some time that Europe has been one of the better places to be. The US can be a little more expense and so while we can see real value in Europe, it seems the logical place to invest,” she added.
Mayell also says that holding developed market equity income stocks will be the best way for an investor to succeed when the Fed and other central banks begin to normalise their monetary policy.
The £231m JPM Multi Asset Income fund was launched in June 2009.
Our data shows that the fund has been a top quartile performer in the IMA Mixed Investment 20%-60% sector over three years with returns of 24 per cent, beating the average fund in the sector by nearly seven percentage points.
Performance of fund versus sector over 3yrs
Source: FE Analytics
The portfolio yields 4.3 per cent and Mayell says the majority of that income comes from the fund’s equity exposure.
However, due to sector constraints they must have at least 30 per cent of the fund in fixed interest securities. The manager says the team are having to look at less traditional fixed income assets to avoid some of the overvalued areas of the bond market such as sovereign debt.
“It is at the front of our mind [which areas will do best after tapering]. We feel that risk assets will continually outperform and that is why we have very little exposure to cash and government bonds. We just can’t justify how expensive gilts are, for instance,” she said.
“We still like high yield because when rates eventually increase not only are you still rewarded with a good yield but you are also not getting interest rates sensitivity. We have around 20 per cent of the fund in high yield, but to put it into context that was at 55 per cent three years ago.”
“Outside of that, we like preference shares and convertible bonds. These are fixed income assets but they are really linked to equities. They fulfil our fixed interest requirement, but they follow what is happening in the equity market,” she added.
JPM Multi Asset Income has an ongoing charges figure (OCF) of 1.43 per cent and requires a minimum investment of £1,000.
