Our Thinking

Your Core Portfolio Insights

Richard Madigan, Chief Investment Officer, J.P. Morgan Private Bank

Fall 2018

It may not feel like it, but U.S. equity markets have had a solid year, up mid-to-high-single digits. Regionally, we are pleased with our decision to hold an overweight to U.S. equities since the beginning of the year; this was a nonconsensus call that is contributing positively to performance, as the U.S. has been the top-performing region globally. For the most part, investors have focused on strong earnings growth (~25% year over year) and revenue growth (+10% yoy) through Q2, which have overpowered concerns around continued trade skirmishes between the U.S. and the rest of the world.


However, this year has shown that not all equity markets are created equal. European and Japanese equity markets have underperformed, and emerging markets have struggled amidst trade tensions and country- specific issues. Turkey in particular has been at the center of headlines recently. Turkey’s current economic stress stems from a large current account deficit and an elevated level of foreign currency debt on the back of a stronger USD. The pain may continue a while longer, particularly if Washington imposes greater sanctions.

"While some money is currently exiting emerging markets equities, total inflows into the asset class remain over $30B year to date."

–Richard Madigan

Chief Investment Officer, J.P. Morgan Private Bank

While some money is currently exiting emerging markets equities, total inflows into the asset class remain over $30B year to date. It is possible that this flow of funds will reverse if Turkish-contagion ramps up further; we will be watching closely. We have not owned broad emerging market equities this year, though we are continuing to search for potential opportunities in emerging markets as negative performance in the asset class continues to mount.

Given constructive economic data and earnings growth, we maintain our pro-cyclical outlook. Earlier this quarter, Fed Chairman Powell helped reaffirm this view, providing an upbeat economic assessment and reiterating the Fed’s path of gradual tightening. We agree with the market when it comes to expecting a September rate hike. December is more “data dependent” in our view, as there are many economic data points to be released between now and then. But two hikes for the remainder of the year seem to be on the table. Our fixed income allocations are still underweight duration, but we’ve added marginally to core bonds as shorter-term government bond yields have become more attractive. Within core bond allocations of certain portfolios, we own a few managers that we consider “core plus” municipal managers, or managers that have a small allocation to high-yield municipals. These positions have been a positive contributor to returns, as high yield municipals have been one of the top-performing fixed income sub-asset classes on a year-to-date basis. However, at the overall portfolio level, we remain underweight fixed income and overweight equities as we believe stocks are likely to outperform bonds over the next 12 months.

"This is a continuation of the broader innovation we’ve delivered over the past few years: insourcing active decision-making to our team of asset class specialists and lowering underlying costs for our clients."

–Richard Madigan

Chief Investment Officer, J.P. Morgan Private Bank

Later this year, we will introduce a new suite of mutual funds, Six Circles Funds, designed exclusively for J.P. Morgan discretionary portfolios. These funds will allow clients to access our team’s granular views within sectors, subsectors, and factors. Traditionally, on the equity side, we were only able to invest in areas of the market where there was a publicly available ETF. For instance, if our team wanted to own European MidCap stocks, we were unable to implement because there were no ETFs available. And sometimes ETFs were available, but they were expensive. Going forward, our CIO Team will have the flexibility to identify virtually any index we want exposure to, and we’ll be able to implement within Six Circles at a lower cost than traditional ETFs or mutual funds. This is a continuation of the broader innovation we’ve delivered over the past few years: insourcing active decision-making to our team of asset class specialists and lowering underlying costs for our clients. This will position us to deliver better results for our clients over time.

Not all investment ideas referenced are suitable for all investors. Investing involves market risk, including the possible loss of principal. There is no guarantee that investment objectives will be reached. Diversification does not guarantee a profit or protect against a loss.

Opinions and estimates offered constitute our judgment as of the date of this material and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The views and strategies described herein may not be suitable for all investors. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.

© 2018 JPMorgan Chase & Co.