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The linked sectors of technology and tech are becoming favoured themes from both a top and bottom up perspective.
ôTech is one of our main sector bets,ö explains Neill Nuttall, London-based head of JPMorgan Asset ManagementÆs global multi-asset group. ôUntil recently our allocation would be close to zero in tech stocks. Because of the flat yield curve there is little benefit in moving up and down the bond risk scale, so there is room to take a more aggressive approach to equities. Our top-down process should provide best-ideas access to the sector.
ôIt has become particularly cheap in light of the fact that basic materials and mining as well as traditionally defensive sectors such as utilities and tobacco are trading at a premium. We also believe the next product cycle will be an attractive one.ö
This positive outlook on the tech product cycle is shared by JPMAMÆs sister company JF Asset Management. Its Greater China team, headed by Howard Wang, used bottom-up research to shift its portfolios to overweight Taiwan.
ôOur Greater China fund is 36% invested in Taiwan,ö he says. ôThis is a slight overweight compared to the index. Up till now the Taiwanese people have not been sharing in the development of wealth, but this is likely to change as we are starting to see a turnaround in up to now negative numbers for consumption of tech and credit.ö
From his bottom-up perspective Wang cites the development of AppleÆs iPhone, MicrosoftÆs Vista, NintendoÆs Wii and rival SonyÆs PS3 games consoles as key drivers behind Taiwan stocks. Further boosts should come from an increase in consumer spending and credit consumption as well as improving relations with mainland China, giving Taiwan a greater share of the fruits from that economic powerhouse.
Back on the quant front JPAMÆs global multi-asset team is also taking advantage of high levels of implied volatility in convertibles to enter the asset class with 12% exposure across its range of total return products. ôConvertibles are asymmetric,ö explains Nuttall. ôThey offer between up to 80% exposure to equity upside but no more than 60% on the downside. Our data has implied volatility at 28% but we believe this will go up, which makes convertibles more attractive.ö
The teamÆs other overweights include US large cap and Europe ex-UK, and underweights in US small caps and emerging-market equities. ôWe are neutral in Japan,ö adds Nuttall, ôbut our next move will probably be to go overweight as we see the equity risk premium, at a time of low interest rates and bond yield, is at its best.ö
The basic quant process run on a monthly basis by JP Morgan Asset ManagementÆs global multi-asset groups has three stages. The first is to consider the relative merits of stocks versus bonds across Europe, American and Asian markets, followed by the same analysis of bonds versus cash. The final stage of the process is to filter national markets across favoured asset classes down to a list of 20 options, of which the top five are chosen. Additional overlays that can be applied include analysis of large versus small cap stocks, high yield versus investment grade, emerging versus established global markets and growth versus value.
JPMAM believes investorsÆ approach to risk has changed to a focus on real returns backed up by a marked shift away from a buy-and-hold style that was gaining favour worldwide.
ôBetween 1950 and 1966,ö says Nuttall, ôannualised equity returns in the US market hit 15% but during the next 16 years it fell to zero. In the same way markets between 1983 and 1999 moved back up to 15% yet from 2000 to 2006 annualised returns fell to zero again.
ôWe are not saying that this is what people can expect from the market for the next 10 years. It is clear that the stock market crash of 1989, the Asian financial crisis of 1997 and the collapse of Long-Term Capital Management in 1998 were general buying opportunities. But investors need to be more mobile and actively asset allocate to generate alpha rather than follow the beta of the market.ö
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