Investment - Articles - Market volatility - JPMAM comment


Bill Eigen, Chief Investment Officer, Absolute Return and Opportunistic Fixed Income, J.P. Morgan Asset Management “We have clearly seen a tremendous amount of volatility across capital markets. Our view heading into the second half of 2015 was that market volatility would be impacted by slowing growth in China, Eurozone tensions and central bank policy divergence.

 The recent volatility has been primarily driven by the first factor, which has put pressure on equities, commodity markets, emerging market currencies, and HY credit. The slowing growth in China has been exacerbated by fears of the impact of Fed tightening and generally rich equity valuations. The relationship between China and commodity markets took on a bigger role than expected but we were anticipated this link to be particularly negative for EM. We expect the US economy to remain mostly insulated from the pressures in EM/China - a strong housing market and service led economy buoyed by consumer confidence are all tailwinds. We are however aware of the potential disinflationary pressures currently impacting market sentiment and expectations.
  
 “In terms of central bank policy, it is still too early to tell whether or not the Fed will liftoff given the extreme tightening of financial conditions in recent weeks. Current expectations are for liftoff at some point this year w/ a strong messaging that the glide path will be a shallow one. The ECB will likely have to respond as all their efforts via QE have been undone.
  
 “The correlation between oil/commodities/risk (particularly HY) has been extremely high. HY spreads in many areas are now at their widest levels since the height of the European debt crisis in 2011. Default rates are still a fraction of what is currently being priced in and fundamentals remain mostly constructive. While we have been cautious to add during this volatility, we are now finding attractive entry points in various derivatives of HY credit. Return expeditions for the Fund's HY beta and long/short credit alpha sleeve have both moved higher over the next 12-18 months. If volatility continues, we expect further dispersion in spread and value and more opportunities to add to risk.
  
 “Anticipating this volatility, the fund made some tactical moves in the last three months to adjust positioning more conservatively: increased the allocation to cash, trimmed energy positions, reduced European HY exposure after the first half rally, and identified profitable EM shorts that were hedging the portfolio broadly. The focus in 2015 on increasing the fund's securitized exposure to provide steady income with low correlation to risk markets has helped reduce drawdown during this period.
  
 “Our expectations are for volatility to remain elevated. We have maintained a high cash balance to protect capital but also to be ready to deploy into risk markets as opportunity presents itself. We are starting to get active while being prudent and aware of the current momentum of this market.”
  

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