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Investing

Is your portfolio primed to uncover 2021’s opportunities?

Three themes can help guide—and potentially enhance—your investment strategy this year.


 

As we explore in our 2021 Outlook, we believe the global economic recovery is well underway. Vaccines promise an eventual end to the pandemic, and monetary and fiscal policy will continue to be supportive. That’s good news for investors, of course. But what might it mean for your own investment portfolio?  In a healing global economy, financial markets offer a wide range of opportunities to uncover and risks to manage. To guide our investing in 2021, we’re focusing on three key themes: finding yield, harnessing megatrends and navigating volatility. Here’s our thinking:

 

1) Find yield

Prospects seem bleak for investors seeking income. Interest rates across the global fixed income landscape are at secular lows; 25% of all investment grade debt has a negative yield, and the market isn’t expecting a Federal Reserve interest rate hike until the end of 2023. Meanwhile in Europe, policy rates have been negative since 2014 and are expected to stay there for the rest of the decade.

How can you find income? First, you can reduce excess cash and consider enhancing yield in mortgage-backed securities and some investment grade corporate credit. You can also increase risk further, perhaps by taking advantage of good opportunities in the high yield corporate bond market. Adding a modest amount of leverage here may be appropriate in certain situations.

Remember, too, to think about yield on an after-tax basis. For U.S. taxpayers, high yield municipals offer tax-equivalent yield well above other areas of the market. The same holds true for many preferred equities.

Finally, you may also consider exchanging liquidity for potential excess yield. In this context, we focus on private credit opportunities, real estate and infrastructure assets to help augment yield.

With global bonds near all-time lows, consider an expanded toolkit

2) Harness megatrends

Which stocks are most likely to double, triple, quadruple or more in the next few years? Look at these three megatrends: digital transformation, healthcare innovation and sustainability. These trends are likely to generate superior earnings growth that is not as reliant on cyclical tailwinds. The pandemic forced the world to operate in the digital economy, and catalyzed new ways to diagnose and treat disease. The Biden administration is likely to pursue policies that support the development of clean technologies and infrastructure. In short, we believe these megatrends still have room to run.

Digital transformation—The future is rushing at us

A long-term shift to digital has only just begun. To understand why, consider the implications of the 5G infrastructure upgrade. In 2021, we expect the number of 5G smartphones purchased by consumers to double, to 450 million. What’s more, an even greater opportunity could lie in enterprise applications. Manufacturing is expected to account for 19% of the 5G-enabled revenue opportunity by 2030, the second-largest contributor behind healthcare.1

Imagine the 5G-enabled factory of the (not-so-distant) future. Products could be designed virtually, assembled by 5G-connected, untethered and collaborative robots (“cobots”). Employees could use 5G-enabled augmented reality (AR) capabilities to execute assembly tasks. Real-time customer order data could inform the manufacturing process. The factory of the future is just one example of the possibilities that digital transformation could unlock.

Healthcare innovation—The demand is acute

The successful effort to develop a COVID-19 vaccine demonstrates what the global healthcare community can accomplish, but the pandemic has also made clear the world’s need for quick and scalable medical testing and improved diagnostic capabilities. Imagine if we could test whole cities or countries at once. This future is coming at us quickly. 

We see significant investment opportunity in testing and diagnostics. Advances made in coronavirus-testing technology and manufacturing should enable other testing capabilities (for the flu, pregnancies and beyond) that will be available at home, the airport or the point-of-care. For example, relatively inexpensive liquid biopsies take plasma from a patient and allow doctors to detect some forms of cancer up to a year before other tests can. The ease of sampling a patient through liquid biopsies might allow oncologists to give more informed, precise treatments.2  This, too, is just one example of healthcare innovation that can create value in the coming years.

Sustainability—The movement is now mainstream 

We are finding significant opportunities along the clean energy supply chain, and we see a global drive toward developing a more circular economy, especially in the food industry.3 A circular economy is one in which there is no waste because all leftovers from production are fed back into the system and used to create new useable products.

Why is a circular economy so important? If we continue on our current path, global demand for resources will outstrip the planet’s capacity by more than 400% by 2050.4

To make food production more sustainable, the world is turning to agriculture technology (AgTech) and using the latest technology to improve traditional food production’s yield, efficiency and sustainability. Vertical farming (growing food indoors in stacked vertical layers) is getting a lot of attention, and its market is expected to increase almost 6X globally between 2018 and 2026.5 With this revolution, food producers can grow more food on the same amount of land, and they can recreate any climate on earth. You can even grow basil in conditions based on the summer of 1997 in Genoa, Italy, which is widely regarded as the perfect summer for the herb!

More immediately, the Biden administration will likely prioritize and incentivize green technology and infrastructure. That will be just one of many signs that sustainability has gone mainstream.

 

3) Navigate volatility

We still believe core bonds, such as sovereign debt and investment grade corporates, provide the most efficient way to dampen volatility in portfolios. But we think it’s best to add other types of protection to portfolios, too. Specifically, we prefer hedge funds as a complement to core fixed income. In 2020, the hedge fund portfolios that we manage provided protection in volatile markets while delivering compelling returns. Going forward, we expect hedge funds will continue to outperform core fixed income, with a lower volatility than high yield bonds.

How will we be choosing hedge fund strategies? We will stay focused on effective, dynamic managers who operate in niche areas of the market (such as equity special situations, structured credit, merger arbitrage and foreign exchange). Protection is all about managing correlation and diversification; identifying differentiated return streams can help to dampen volatility.

Consider a range of options when you’re looking for portfolio ballast. To dampen volatility in 2021, we suggest more than one type of portfolio protection.

Final thoughts

You’ll be weighing a wide range of issues as you think about your own investment portfolio in 2021. We do think the three themes we have discussed—finding yield, harnessing megatrends and navigating volatility—merit close consideration. Market environments shift and evolve—that’s a given. But these themes will offer real potential over both the short term and long term. Talk to your J.P. Morgan team to learn more about how these themes can best fit into your own investment strategy and align with your goals.

 

1.“5G for business: a 2030 market compass,” Ericsson, October 2019.
2.Anastasia Amoroso, “Precision medicine: The next trend in healthcare innovation,” J.P. Morgan, August 20, 2020,  https://privatebank.jpmorgan.com/gl/en/insights/investing/precision-medicine-the-next-trend-in-healthcare-innovation.
3.“What is a circular economy and how can you invest in it?,” J.P. Morgan, January 15, 2020, https://privatebank.jpmorgan.com/gl/en/insights/investing/what-is-a-circular-economy-and-how-to-invest-in-it.
4.“Circular Advantage,” Accenture Strategy, May 2015.
5.“Global Vertical Farming Market to Reach $12.77 Billion by 2026 at 24.6% CAGR,” Allied Market Research, February 25, 2020.

 

 

 

 

IMPORTANT INFORMATION

All companies referenced are shown for illustrative purposes only, and are not intended as a recommendation or endorsement by J.P. Morgan in this context.

All market and economic data as of February 2020 and sourced from Bloomberg, FactSet and Gavekal unless otherwise stated.

The information presented is not intended to be making value judgments on the preferred outcome of any government decision.


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