J.P. Morgan Private Bank is capturing alpha in fixed income through asset-backed securities, corporate hybrids and private credit, its Southeast Asia head of investments told Citywire Asia.
At a time when most money managers are cautious on fixed income amidst the low interest rate environment and paltry yields, the firm is seeking returns across the capital structure for clients.
‘We have seen a lot of continued interest in fixed income but as yields have stayed low and spreads have compressed, clients are having to get more creative about where they get that return from,’ said Christophe Aba.
The private bank is recommending active bond fund managers investing in more niche areas, such as real estate mortgage-backed securities and collateralised loan obligations (CLOs).
‘Things like CLO can be a dirty word, but you have to understand what the risks are and how they work. Some of the securities were at the eye of the storm [during the crisis] in terms of price volatility, but in terms of actual default rates and returns, they were excellent over time,’ Aba added.
In private credit, J.P Morgan has invested in senior loans, mezzanine debt financing as well as US distressed debt through a private equity partner. In distressed debt, the US private bank looks for good companies with balanced sheets.
It is also bullish on equities for 2018. ‘Valuations are above average but hopefully earnings will help bring that down over time - but they aren't in bubble territory,’ he said.
‘And of course relative to bonds, where clients see a diminishing opportunity set in fixed income, equities are pretty attractive.’
Aba is very optimistic about earnings in the US, based on healthy consumer balance sheets, a weaker US dollar, share buybacks, dividends, cheap credit, as well as low labour and commodity costs.
J.P. Morgan is overweight technology, financials, healthcare and industrials in the US. The latter two were upgraded from neutral in 2017.
Within emerging markets, the Singapore-based executive prefers emerging Asia and sees opportunities in Asian credit. The bank made significant returns from its emerging market local and hard currency debt investments in 2016 and 2017.
‘Where the earnings growth will be the biggest is probably where we, on the margin, will add risk,’ he concluded.