John Bilton said a better approach is to build diversification into portfolios to ride through the short-term noise and not take risky bets on market direction.
He explained because there is a very low level of correlation across global equity indices, it is more efficient to build a portfolio by taking a set of small diversified bets across a range of indices rather than take long/short bets.
“You don’t get the calendar out and say, ‘We haven’t had a correction for a long time, therefore it will come tomorrow’. Trying to look at what is a correction phase and time it, is something of a fool’s errand.”
His comments come at a time when it is almost two years since equity or credit markets fell by more than 5%.
No warning signs
Bilton is comfortable on a 12-18 month view that the case for the equity market remains constructive.
He said for a correction to occur there needs to simultaneously be “an excess of positioning, an excess of valuation, an excess of exuberance, and a catalyst” but Bilton does not believe the market is experiencing all these factors at the same time.
He added the likelihood of a catalyst appearing is “entirely random”, and admitted the market is “relatively fully-valued”. But when it comes to positioning and sentiment, he said: “I don’t think either of those positions are flashing amber.”
“Could we get a dip tomorrow? You could get some sabre rattling from Pyongyang and the S&P could have a few bad days, but the reality is when we look as long-term investors at what happens in corrections we don’t make a point of timing market moves; we look at having sufficient portfolio robustness that we can turn into opportunities to alter risk diversification and build in returns.”
Risk-on
JPMAM is maintaining a risk-on sentiment in its asset allocation and has a broad diversification across global equity markets. Of these, it favours the eurozone and Japan ahead of the US and emerging markets.
“The US is doing OK but only a bit above trend so you have more potential for positive surprise in places like Europe and Japan and that is why we like having overweights there,” said Bilton.
Elsewhere, the firm sees US treasuries outperforming most other sovereign markets, in particular German bunds, which it said look vulnerable given solid eurozone growth. It is neutral on credit, real estate and commodities and underweight cash.
