JPMorgan bullish on corporate bonds to weather bank storm
• Investment chief Jed Laskowitz says valuations are more attractive after sell-off in wake of recent bank failures
Jed Laskowitz, a chief investment officer at JPMorgan Asset Management (JPMAM), is bullish on high-grade corporate bonds to ride out a global storm after bank failures on both sides of the Atlantic.
In what is probably the largest allocation yet in his multi-asset portfolios, he is overweight on investmentgrade credit, a position funded mostly from cash, Laskowitz said. It offers returns “in a world where growth remains slow and earnings in the US are uncertain”, he said.
His big-picture view is that while there is still much to be done about the banking sector, the swift responses from authorities will limit contagion so there is no reason to be super bearish. Valuations, meanwhile, are more attractive after the selloff, with company bonds yielding almost twice their average since 2018, according to a Bloomberg index of global credit.
Gains in financial shares cautiously lifted global stocks at the start of the week, while Treasuries retreated as fears of a broader shake-out eased.
Risks remain, however. The danger of an economic hard landing in the US has increased, Laskowitz said, even as the Federal Reserve’s statement after last week’s rate hike suggested the end of tightening was near. He is more or less neutral on equities, preferring European and emerging-market stocks, led by China, to those in North America.
“It’s important to not capitulate at the wrong time, which tends to happen in an investor’s psychology — selling at the bottom, buying at the top,” said Laskowitz, who is also head of asset management solutions at the firm. “The most clear and present danger here is the security of the financial system, but the events have been reasonably isolated and handled expeditiously. We feel there is enough stability.”
‘NOT THERE YET’
He is closely watching how less liquidity and tighter credit conditions, a result of the most aggressive Fed tightening in at least 40 years, affect the consumer, small businesses and commercial real estate. Credit card balances, for example, are already on the rise. “Those risks, for now, are not enough for us to take a large underweight positions in equities,” he said.
“It’s important not to overlook the opportunities. The risk is that the Fed tightening and a deeper recession could lead to a deeper earnings recession. But we’re not there yet.”
Laskowitz has been adding to his investment-grade bond position since the fourth quarter on a view that the Fed would slow tightening to avoid “breaking the back” of the economy to cool inflation.
Within equities, he has made relative-value decisions such as buying European stocks and being underweight US stocks. He prefers big caps to small companies and would consider shifting to an overweight position if inflation eases and there is an improvement in earnings expectations in response to better growth. The intermediate investment-grade credit he is buying offers “carry” by generating about 125-150 basis points over five-year Treasuries. He has been extending the maturity profile of government bonds and some of his portfolios are overweight in duration.
Another plus for investors is the return of a negative correlation between stocks and bonds, he said. Balanced investors — those who allocate 60% to equity and 40% to bonds — had a rough year last year as it was the first time since 1974 that stocks and bonds went down in tandem, according to JPMAM data. That means bonds offered no cushion for the losses in equities.
“Bonds are now part of the solution and not the problem, given the starting point in yields,” he said. “Investors should use the ballast that bonds are giving as a way of navigating a volatile equity environment.”
BONDS ARE NOW PART OF THE SOLUTION AND NOT THE PROBLEM, GIVEN THE STARTING POINT IN YIELDS