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Looming recession and persistent volatility accentuate the J.P. Morgan difference

The Edge Singapore
The Edge Singapore • 8 min read
Looming recession and persistent volatility accentuate the J.P. Morgan difference
Best Group over 3 years: BOND
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Best Group over 3 years: BOND

SINGAPORE (April 30): A global recession is looming due to the health and economic wreckage caused by the Covid-19 pandemic. However, for investors seeking income from bond investments, there are both opportunities and risks in the market today, says Ramon Maronilla, J.P. Morgan Asset Management’s managing director, head of the Asia ex-Japan investment specialist team for global fixed income, currency & commodities (GFICC) group.

“The key question is no longer whether we will enter a recession, but rather its severity and length. The answer to this centres on the speed with which the spread of the virus can be mitigated and the global economy reopened, as well as the effectiveness of global policy responses,” he says.

“Given the amount of uncertainties that still exist, we remain generally cautious on risk, noting that volatility is likely to persist as the news flow evolves,” he adds.

Within this environment, the investment professionals at J.P. Morgan Asset Management have been actively monitoring the markets and adjusting portfolios in response to changing conditions.

For example, the JPMorgan Funds — Income Fund, has shifted asset allocation to take advantage of the most compelling fixed income opportunities around the world.

“In this strategy we entered March with reduced risk exposures, improved overall credit quality across the portfolio, and substantially increased high quality government duration — a defensive posture that has helped limit drawdowns during the sell-off,” says Maronilla.

The investment team is always on the lookout for ways to limit exposure to riskier sectors that may not compensate investors as much for taking risks, such as emerging market debt. Meanwhile, the team is also seeking better opportunities in other sectors that are trading at significantly higher yields but can do well even in highly stressed go-forward scenarios, such as specific parts of the securitised credit markets, he elaborates.

Ramon Maronilla, J.P. Morgan Asset Management’s managing director, head of the
Asia ex-Japan investment specialist team for global fixed income, currency & commodities (GFICC) group

Fluid situation
As just about any market participant will agree, the Covid-19 pandemic that the world now faces is both extraordinary and unprecedented. Its impact on the global economy and markets has been profound to say the least.

This crisis has the potential to change the behaviours of markets and investors and there will be long term ramifications for years to come. Central bankers and policy makers around the world have mounted significant and highly innovative programmes to help stabilise their markets and economies.

“While significant monetary and fiscal policy responses have led to improvements in market sentiment and liquidity conditions, we believe there are still plenty of uncertainties and the situation remains fluid,” says Maronilla.

“Sectors which enjoy direct sponsorship from the US Federal Reserve have been the biggest beneficiaries, while there is greater dispersion in performance among sectors without central bank support, underscoring the importance of taking an active and selective approach to global bond market investing,” he notes.

The 275-strong global fixed income, currency and commodities team at J.P. Morgan Asset Management uses deep research in analysing the impact of Fed purchases on technical factors and liquidity in light of the broader fundamental macro picture.

“These policy measures provide a powerful backstop to the supported sectors and we believe the Fed will expand these programs as needed to keep borrowers solvent until the crisis abates,” he says.

Across market cycles
This team is also the reason why J.P. Morgan Asset Management won the Best Group over 3 years — Bond, at this year’s Refinitiv Lipper Fund Awards 2020.

Over the last 10 years ended December 2019, 81% of J.P. Morgan Asset Management’s broader global fixed income strategies and 100% of its unconstrained bond strategies have generated performance above peer median, says Maronilla.

According to Maronilla, a few key characteristics distinguish the firm’s global fixed income team. First, standout expertise. It is one of the world’s largest fixed income investment teams, with broad experience gained across regions and market cycles and a globally integrated team of experienced investment professionals.

Next, the team’s disciplined process. A common research language ensures that the most compelling ideas are fully reflected in portfolios, while multi-dimensional risk management is embedded at every stage of its investment process.

Last but not least, the team shows results. It uses a wide variety of outcome-oriented solutions designed to help investors build stronger fixed income portfolios.

“We believe the best fixed income outcomes are a result of combining the keenest minds with the most comprehensive resources. That’s why our fixed income solutions fully leverage the breadth of our global expertise, providing comprehensive coverage of markets, sectors and bond strategies to meet the demands of today’s institutional and retail investors,” says Maronilla.

Another key factor that sets J.P. Morgan Asset Management apart is its shared global fixed income research framework.

“Every fixed income investment decision we make is assessed based on our in-depth fundamental, quantitative and technical analysis,” he explains.

This award-winning team has also institutionalised a comprehensive investment framework that can be crisply summed up as “F”, “Q”, and “T” that covers both the broad strategy down to the individual bond.

The first is F, which stands fundamental analysis. This involves a comprehensive assessment of macroeconomic data, such as growth and inflation, as well as corporate health figures, such as default rates, earnings and leverage metrics.

Next, the team looks at Q, which stands for quantitative valuations. This includes spreads, yields and other measures that determine the extent to which a sector or security is over or undervalued– on an absolute basis, versus history and relative to other sectors.

The last T stands for technical analysis — this includes supply and demand dynamics, issuance, maturities and flows, as well as investor positioning, sentiment and liquidity.

Maronilla has some suggestions on how income investors can get a better handle on the market. For one, they should focus on cross-asset correlations, not just sector diversification. Case in point: Markets were caught off guard in mid-March when for a period of time even US Treasury prices seemed to move lower in-tandem with risky sectors such as equities, putting their diversification benefits into question.

“This breakdown in traditional correlations typically unfolds when fundamentals are overwhelmed by technicals, which drive prices lower even across typically less correlated sectors. This was exacerbated by other factors including rebalancing from bonds to equities, forced liquidations due to margin calls and the sale of bonds which suffered the least losses,” he explains.

Also, investors should constantly employ stress tests and scenario analysis of various economic scenarios, market movements and liquidity conditions both on an overall portfolio level as well as down to each individual security.

“For instance, many of our securitised credit holdings were stress tested for a prolonged period of economic recession without government support. Even in these downside scenarios, we do not expect them to experience material write-downs given stringent underwriting standards, strong fundamentals of the underlying borrowers and capital structures that offer sufficient levels of credit subordination,” says Maronilla.

This systematic approach is what J.P. Morgan Asset Management offers clients and investors, to help them effectively navigate market turmoil and help them seek to achieve strong risk-adjusted returns, across every major fixed income sector. After all, it has already been doing so for the past 60 years.

“It is during these periods of higher volatility, greater uncertainty and increasing complexity that our competitive strengths have set us apart,” says Maronilla.

The J.P. Morgan Asset Management Advantage

Breadth and depth of global capabilities
Our team has deep capabilities across 15 major fixed income sectors in more than 60 markets. This allows us to identify and capture opportunities across traditional and extended sectors globally, without structural biases, while maintaining effective diversification in the process. As global economies become increasingly integrated, deep knowledge into each market and sector provides valuable insights that can be applied across regions and strategies.

Proprietary research and analysis
Our research capabilities are distinguished by our scope, quality and reliability. We rely primarily on our own analysis, which reflects our long-term view. Our proprietary research allows us to take controlled, considered positions designed with an objective to enhance performance while controlling risk. Third party research can often serve as supplementary resources against which we can review and compare our views and assumptions.

A culture of engagement and robust dialogue
Global debate forms the foundation of our investment process, with investors across the firm contributing to our various regular and informal strategy sessions. The meetings are highly interactive where portfolio managers challenge each other’s views and ideas to ensure comprehensive discussions around economies, markets and strategies. This culture encourages and facilitates the exchange of ideas within a positive and constructive environment, fully capitalising on the intellectual capabilities of the team as a whole.

Rigorous risk management
Risk management is of paramount importance and forms an integral part of the investment process. All investment decisions are taken by a team of skilled and experienced professionals and incorporate stringent buy/sell disciplines as well as clearly defined models. We adopt a multi-disciplinary approach to risk management and employ a whole range of tools and analysis. This includes stress testing market and liquidity conditions to measure and mitigate potential downside in the event of tail-risks occurring. Risk management also operates at all other levels of our asset management business including operational, contingency planning, disaster recovery and peer reviews.

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