Does it make sense to re-engage with markets?
Dec 17, 2012 | Our Perspectives Archive
Investors today face a number of challenges, but we still see opportunities in global markets. Richard Madigan, Chief Investment Officer of J.P. Morgan Private Bank, is tasked with overseeing our investment strategy and asset allocation, and identifying areas of interest and growth. However, he is finding that many investors are still wary of markets. "With our clients, one of the recurring themes is, 'Can I trust markets again?'" Mr. Madigan comments. "But you have to figure out whether you believe the world goes on. We think it does, and clients who agree with that view will eventually have to re-engage with markets."
For those investors who do want to re-engage, Mr. Madigan sees possibilities in several areas, including the United States. He says, "The single strongest anchor we’ve had in our global equity allocations has been the United States, making up between 60% and 65%." He puts this down to the fact that "the United States continues to lead the global economic recovery, and it has been the most aggressive in its policy response to the downturn," adding, "When we look at the United States, we see strong earnings in a disinflationary environment, with reasonable growth."
Credit is also an interesting proposition. It has been a great success story over the past 12 months, but Mr. Madigan cautions that such high levels of return may not continue. "We still believe in credit. What we’re adjusting is our return expectations," he says. "In 2012, U.S. high yield returned 10%–12%, while emerging markets debt gave 12%–14%. While these are still fundamentally strong investments, return expectations for 2013 are about half that level."
Instead, Mr. Madigan is rebalancing toward other opportunities, such as China, which continues to expand, albeit not as strongly as in recent years. "We expect China to grow 7%–8% over the next 12 months, which is still attractive," he says. "As the country develops, we see it becoming more inwardly focused. As a result, our Hong Kong–based team spends a lot of time looking at domestic and regional opportunities."
But having the skills, resources and experience to identify opportunities doesn’t benefit investors if they are avoiding markets, following the turbulence of the last few years. Mr. Madigan believes that being in markets and being properly allocated are key to reaching your long-term wealth management goals. "We've seen some frustration from people as they realize that the little bit they put in markets wasn’t enough to compensate for the rest that they didn't," he says. "Part of the risk rotation we expect to see from clients isn’t so much shifting around positions in existing portfolios, but getting them to fund from the cash they’re holding."
In Mr. Madigan’s view, markets are now becoming more normalized. He says, "It’s a lower growth environment, but it is a market that is getting better, and a world economy that is healing." We believe this return to normality should help investors grow in confidence and find their way back to markets.
For more additional insights, you can read an excerpt from Mr. Madigan's monthly publication, Market Thoughts. We invite you to contact us to learn more and a J.P. Morgan representative will be in touch with you.