Strategist for $1.7tr funds says rout has room to run
Don't be fooled into thinking the rebound in stocks means we've reached the bottom, says Marcella Chow, who watches the world's markets for JPMorgan Asset Management Inc.
The global strategist for the $1.7 trillion money manager says she's on edge, her clients are panicky and she's telling them to stash as much as 70 percent of holdings in bonds including U.S. Treasuries. Calm won't return until China's economy improves and central banks regain credibility with investors, she said. She's waiting for oil to fall to as low as $22 a barrel, and in the meantime she's battening down and trying to avoid volatility.
Global equities have recouped some losses since the end of last week after a selloff that sent them into a bear market for the first time in five years. Oil has climbed back to near $30 a barrel after plunging to its lowest since 2003, banks have shaken off fears about their ability to repay debt, and monetary policy makers from China to Europe have been speaking out to reassure investors. None of this convinces Chow the worst is over.
"Am I worried? Yes," Chow said in a Feb. 15 phone interview from Hong Kong. "There's so much uncertainty," she said. "Equities might not be a wise choice." Treasuries are the best haven from a rout that wiped $7.5 trillion from global shares this year, said Chow, because the Federal Reserve is unlikely to rush to raise interest rates again soon. Fed Chair Janet Yellen said this month continued market turmoil could throw the central bank off course from the multiple increases it forecast for 2016. A measure of U.S. government bonds has gained 2.4 percent this year. Stocks in Asia fell on Wednesday, with Japan's Topix index dropping 1.6 percent as of 2:07 p.m. in Tokyo. The Shanghai Composite Index slid 0.3 percent and Hong Kong's Hang Seng Index declined 0.5 percent.
Hong Kong-based Chow joined JPMorgan last year from Bank of America Corp.'s Merrill Lynch, where she was an economist for emerging Asian countries. In September, she started telling investors to shift to a 70 percent weighting for debt from an equal mix of stocks and bonds. Since the beginning of October, the Bloomberg U.S. Treasury Bond Index has gained 2 percent, while a measure of global equities has lost 4.3 percent. Gold, which has risen 14 percent in 2016, could easily fall, says Chow, noting that JPMorgan Asset sees it as correlated with other commodities. While investors such as KKR & Co. recommend increasing cash as a buffer, Chow says that's a mistake, too.
"Even though it's tempting to hold cash given how crazy markets have been, it's better to go for stable bonds," Chow said. "At least you can generate a few percentage points in returns." Chow says she's anxious about China's manufacturing slowdown as the country transforms into a service economy. The official factory gauge signaled a record sixth straight month of deterioration in January. Billionaire investor George Soros said last month the Chinese economy is headed for a hard landing, while hedge fund manager Kyle Bass said the banking system may have losses more than four times those of U.S. banks during the financial crisis.
"China's growth stabilization story is still unclear," said Chow, who sees e-commerce business as one bright spot in Asia's biggest economy. "We have to wait and see what happens." Oil could drop to as low as $22 a barrel, according to Chow.
West Texas Intermediate traded at $29.23 as of 2:09 p.m. in Tokyo. Saudi Arabia and Russia agreed Tuesday to freeze output at near-record levels. Oil pared gains after the accord was announced, signaling traders see no immediate end to the global supply glut. Crude markets could "drown in oversupply," sending prices even lower, according to the International Energy Agency, which trimmed its 2016 estimates of global demand for the commodity last month. About 150 oil and gas companies may go bust as a supply glut pressures prices and punishes revenues, said energy consultant IHS Inc.