Why this investment strategy can’t be ignored in 2017

A multi-asset income investing strategy may be the best approach for generating returns in 2017, in the face of a moderate improvement in the global economy and a rising interest rate environment, according to J.P. Morgan Asset Management.

Income investing is a critical element for investors aiming to reach varying goals at different life stages, particularly in the wake of four key investment themes, that are expected to dominate the markets in 2017. These themes are global economic growth, rising inflation, monetary policy changes, and political risk.

In general, income investing aims to generate cash income in the form of dividends, interest, or capital gains in equity or fixed income.

For J.P. Morgan, managing income portfolios involve hitting three targets at the same time: an income target, a total return target, and risk-return target.

“We have to deliver income, but we have to deliver it in terms of total return. It’s no good to reach for very high income if you’re going to lose capital on the other side. That’s what happened in 2015 for a lot of investors who went for high yield bonds. They managed to get 8% yield but lost 20% of capital. For us, it’s income in a total return and risk management context. We have to deliver in controlled volatility,” says Leon Goldfeld, managing director and chief market strategist at J.P. Morgan Asset Management.

J.P. Morgan sees investment opportunities in cyclicals and financials, with defensive cash flows and attractive valuations, such as banks, resources, and in energy. Dividend stocks with low beta and low value would also be good investment choices.

“The need for income is a natural need because of demographics and an ageing population. It is a structural factor not determined by policies in the US, (and) not determined by who the President is,” says Goldfeld.

J.P. Morgan expects the US Federal Reserve to stay on a gradual path of monetary policy normalization with two to three possible interest rate hikes 2017.

“In a rising interest rate environment, income investing can still outperform the market," says Julie Ho, executive director of J.P. Morgan Asset Management.

Although US president-elect Donald Trump’s policies are tilted to benefit the US equity market, J.P. Morgan still believes Asian stocks will outperform in 2017.

“The pickup in emerging market growth, especially in large economies such as China, India, and Indonesia, has already benefited consumption-related companies and could cascade into industrials,” says Ho.

“Our 2017 market outlook is for a stable investment landscape dominated by these four big themes. With the highs and lows of 2016 now behind us, the previous year looks to be a year of respectable returns,” says Tai Hui, chief market strategist, Asia of J.P. Morgan Asset Management.

In terms of growth, manufacturing PMIs (Purchasing Managers’ Index) have reflected an improvement in global growth momentum in recent months, that is expected to carry on in the first half of 2017.

“This means stable, if modest, global economic growth should shore up recoveries and support confidence in 2017, tempered, however, by sluggish trade and corporate caution about business investment,” Hui says.

Inflation, which has been low since 2015, because of declining energy prices, is expected to reverse in the first half of 2017. “Headline inflation may be warming with energy prices rising from their 2016 bottom, and investors may worry, but we expect price stability and continuing central bank accommodation in 2017,” Hui says.

Monetary policy changes may be considered by central banks, such as the Bank of Japan (BoJ) and the European Central Bank (ECB), particularly in the face of the limitations of the quantitative easing (QE) programmes and negative interest rate policies. However, J.P. Morgan does not expect the BoJ and the ECB to reverse their ultra-loose policy positions anytime soon.

Political risk in the form of uncertainty in US policies in the wake of the Trump administration; elections in France, Germany and the Netherlands; and the rise of anti-establishment populist parties, are expected to be a source of market volatility in 2017.