A calamitous fourth quarter followed by booming equity markets. Expectations of multiple rate hikes being supplanted by concerns of a cut. Welcome to 2019.
It’s been a difficult year to anticipate. Surprise economic shifts and geopolitical developments have left many investors wondering how best to make money – or avoid losing it.
Talib Sheikh, the head of multi-asset strategy at Jupiter Asset Management, appears relatively relaxed in this environment. Maybe it’s not so surprising given he has lived through a period of huge market swings, after forming the UK fund house’s multi-asset fund capabilities in September 2018.
“We founded the fund pretty much near the top of the market on September 20, and it was certainly a baptism of fire to navigate away from that risk,” he recounted to a set of family office representatives at separate roundtables in Hong Kong and Singapore, in mid-March.
Despite this tough beginning, Sheikh maintains a relatively positive view of the financial situation. “We are thinking about this environment from a 2016 framework [of economic stability] and looking for opportunities to deploy capital rather than running away.”
He noted there was one key caveat to this: “Valuations now seem a bit more stretched; they look about fair value in the US, while we are most worried about the economic backdrop in Europe and its effect on equities. And when I start thinking about where to find some value, we look to this region.”
Sheikh had worked for 20 years at JP Morgan Asset Management before moving to Jupiter in June 2018. He fielded many audience questions about the world’s geopolitical situation, most particularly about the ongoing trade tensions between the US and China.
The fund manager underlined that he takes a top-down investing perspective, with the latest news headline rarely impacting his investing strategy. That’s not to say Sheikh doesn’t keep an eye on geopolitical noise.
“Some longer-term strategic issues are unsolvable around [issues such as] Belt-And-Road, Made in China 2020, intellectual property protection enforcement, etcetera,” he said. “We feed those into our longer-term macro analysis, but we’re comfortable not trying to trade on the ins and outs of whether [the US and China] strike a deal or not.”
Instead, he has looked to invest in assets set to benefit from no major economic downturn. Sheikh has built a 30% position in cash equities, one-third of which is based in Asia with the rest largely in the US. Another 35% is in high yield debt, also largely in the US, with the rest in safer debt instruments. Sheikh has also gradually been shifting positions from emerging market corporate credits into emerging market equities and emerging market local currency bonds.
To make these relatively aggressive allocations Sheikh has had to look through elevated market swings; something he believes more investors will have to learn. “The challenge for all investors is to navigate a lower return environment with a higher volatility,” he noted.
For many investors this will require a big change in investing strategy. “Over the past 10 years if you just bought some equities and some bonds and a bit of credit, you could ensure fairly stable returns. I’m less convinced that’s the right strategy for the next 10.”
So what is the best strategy today?
“You are all going to need to be more active and think more creatively about how portfolios are structured,” Sheikh told his audiences. “That creates opportunities and challenges. It’s also easier to do if you are more active and nimble, and harder if you’re running a multi-billion strategy.”
Another issue investors need to consider is how ongoing levels of liquidity impact economies and thus markets. “Around the world we have seen liquidity become more abundant,” said Sheikh. “Has that had any economic impact? That’s the million dollar question.”
Beijing seems to believe so. China revealed slightly weaker than expected data on March 14, and the country is expected to conduct more stimulus measures to prop up economic growth.
Sheikh argued that the desire of governments to add liquidity could, at least in the shorter term, offer further market highs. One would be the S&P 500, which he believes will beat the 2,930.75 record it set on September 20 in the coming months, partly as more real money investors re-enter the fray.
That said, he said to stay realistic. “Valuations are a constraint; the S&P 500 today is valued at around 16.5 times (on a price-to-earnings ratio), which looks about fair.”
Despite Sheikh’s caution about over-exuberance, he had an important message: don’t expect a global or US recession soon.
“People often say there is a recession every seven years, because there’s been 15 since 1900. But that’s just arithmetic; there are often long periods of stability and there needs to be a trigger for a recession, which is generally inflation. I don’t see signs of this.”
Hence his overall relative positivity and willingness to delve into some riskier assets. In a period of slowing growth, identifying areas of outperformance is key – but only if you’re nimble enough to take advantage of them.