Massimo Greco at JP Morgan Asset Management sees continued opportunity in European stockpicking
Massimo Greco, head of Continental Europe Funds for JP Morgan Asset Management, sees ongoing stockpicking opportunities in Europe as one facet of the current investment environment.
Do you feel that the general trend of investors purchasing more risk is likely to continue affecting equity and bond markets globally?
Yes, I agree with this, but there is still significant segmentation across asset classes. For cultural reasons or due to portfolio construction constraints, many investors for example want to stay in bonds even in this low yield environment. So we are seeing there is movement between one asset class and another, but more significant is the rotation underway within fixed income.
Where many clients are adding to their holdings in equities and re-risking in that part of the portfolio, in bonds they are de-risking. They are moving away from traditional, long only fixed income and moving towards absolute return oriented strategies that have more protection for interest rate and duration risk, that have more global flexibility, etc. It is not so simple as bonds versus stocks.
In terms of the equity side, I think we continue to see signs of life in European equities after many years of very little appetite from investors. We have not yet seen much in the way of inflows, but predict this will increase as investors want to get more exposure to Europe.
How does this sit against the trend seen for increasing supply of multi-asset type products in the market?
Multi-asset products offer balance and diversification, which is the appeal of investing in mutual funds in the first place. Significant appetite for these products suggests durable interest from European investors that historically were not big buyers. Investors are wary of volatility and they want strategies that offer balance.
Also, as the migration back toward equities continues, many investors see multi-asset as a sensible transition back towards risk assets, rather than going straight from bonds to equities. Leaving bonds to go into stocks is too drastic a move for many investors. So, in a sense, many are using these multi-asset strategies as a stepping stone.
Also, how does this sit against the increasing use, anecdotally, of ‘solutions’ rather than ‘products’ in discussions between investors and either intermediaries and/or fund providers directly?
Whatever you want to call it – a ‘product’ or a ‘solution’ – there is a clear trend among investors towards outcome oriented approaches. They want funds that deliver attractive and stable yield and offer diversification. They want to grasp an outcome that will resonate as part of their overall financial return goals as opposed to focusing overmuch on statistical parameters like tracking error or peer group performance comparisons. This is not as relevant to them, so what we focus on is the client experience. We stopped selling funds based solely on past performance a long time ago.
Our emphasis is on how investment strategies can help solve challenges. So I do think this focus on ‘solutions’ is important, no matter what terminology you use.
Is the latest Fed decision on not tapering its asset purchases likely to reverse the outflow from EM assets that was seen through the middle of 2013 as investors looked to expectations of rising US interest rates?
With the Fed tapering, for the markets it is a question of exactly when and what. The market has already priced so much of this. We will see volatility around the quantity and the timing when the Fed does finally begin to taper, but this is yesterday’s news.
In terms of the impact on emerging markets, this asset class has been the significant underperformer of the year for a reason. At the margin the continued liquidity from the Fed taper delay could benefit flows, but again we think most of this is already priced into markets.
Investors who see the long-term valuations in emerging markets look attractive are also cautious of protecting against loss, so again the desire for balance is reflected here. Investors are looking for funds that give them exposure to growth but protect against the downside. One of our new strategies combines emerging market equities and emerging market debt with a mandate for generating income and early appetite for that product suggests to us it is resonating.
What does this mean for US assets – both equities and bonds?
What really matters in the US is growth. The ability to corporate earnings to continue to grow will allow the markets to move higher and that is the focus for investors.
The headwinds in the US economy are fading. Households have been through deleveraging and household wealth is on the rise as housing market and equity markets move higher.
Eventually the markets will realise that they no longer need the ‘medicine’ from the US Fed (in the form of extraordinary) stimulus to be healthy and that they can stand on their own strength. When the Fed does begin to tighten, this will be a sign that the economy recovery is healthy enough to sustain growth without help.