Top investment themes revealed

Top investment themes revealed

J.P. Morgan Asset Management has named three top investment themes driving markets and investment strategy in the quarterly release of its UK Guide to the Markets.

The guide is a collection of factual charts designed to help advisers explain market conditions to their clients, show them how trends are impacting their money and cut through the emotions of investment decision-making.

Guide to the Markets provides a framework for engaging clients in discussions with clear, compelling charts and statistics. Advisors can choose and present the information most relevant to their clients' portfolios.

Three prominent investment themes highlighted in the new Guide to the Markets are:

Stocks have room to rise; investors may want to consider being overweight

The FTSE 100 Index is up around 10% since the beginning of the year on a total return basis, and the S & P 500 Index has reached record highs. Given the range of global factors supporting stocks, the UK and US equity rallies look like they may still have room to run. In the US, surging household wealth bolstered by a recovering housing market along with a resilient and deleveraged consumer is positive for equities, but it is important to keep in mind that the fiscal drag stemming from Washington's deficit reduction policies remains a headwind.

"Stocks still look cheap relative to bonds," said Dan Morris, Global Market Strategist, J.P. Morgan Asset Management. "US Federal Reserve policies should continue to support risk assets. Despite the strong gains so far this year, we still see ample liquidity, improving sentiment, relative valuations and resilient earnings as reasons to remain bullish."

Investors need to diversify across fixed income and seek yield globally

Accommodative monetary policies from global central banks have artificially held down interest rates, but rates will not stay low forever. Yields will eventually rise and investors should be aware of interest rate sensitivity. The chart below shows the impact that a 1% rise could have on the price and total return of various bond indices.

"Investors should be looking for carry and flexibility with the prospect of rising yields," said Andrew Goldberg, Global Market Strategist, J.P. Morgan Asset Management. "For most, however, the immediate challenge remains grappling with today's painfully low-rate environment. Cash accounts are not keeping pace with inflation and investors have to broaden the search for income. Non-traditional sources such as global dividend-yielding equities, emerging markets debt and high yield bonds look like compelling alternatives."

Emerging markets deserve another look

Emerging markets have disappointed investors on a relative basis in recent months, but they look attractively priced and poised for stronger performance going forward. Emerging markets have a good combination of low indebtedness and robust GDP growth, and with current valuations around 1.6x price-to- book (shown below for the MSCI EM Index), may represent an opportunity for long-term investors able to tolerate some volatility to achieve higher growth.

"Regardless of the investment strategy or asset class an adviser is discussing with their client, Guide to the Markets can help bring clarity and context to the trends and themes moving markets," said Goldberg. "No adviser will be able to predict the future, but understanding exactly where we are today makes you a more informed investor."

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George Bailey