3 multi-asset plays on Quantitative Easing

JP Morgan fund manager Talib Sheikh identifies 3 ways to profit from QE

3 multi-asset plays on Quantitative Easing

Talib Sheikh, fund manager of JPM Multi-Asset Income Fund has identified three assets plays to take advantage of Quantitative Easing (QE) by the European Central Bank (ECB).

Equities

Sheikh explained: “The ECB’s long-awaited salvo against economic stagnation in the form of QE reinforces our conviction in risk assets and particularly in European equities as a source of equity income. With QE signalling that interest rates are going to stay at record low levels of the foreseeable future and in real terms are likely to go even lower, the ability to consistently generate approximately 4% dividend yield from a diversified basket of European equities looks that much better on a relative basis. And on a comparative basis European equity valuations remain cheap.

“We would also expect the euro to maintain its downward trajectory, which should benefit European exporters and in turn strengthen company earnings, helping to bolster market gains.”

Longer Maturity Bonds

He favours longer maturity bonds whose price he expects to continue to stay high as the global demand for these bonds from various different buyers remains strong, bolstering their value. At the same time, he has hedged against the possibility of interest rate volatility in short maturity bonds – which may be impacted if the US Federal Reserve raises rates this year – by maintaining a duration hedge at portfolio level using five-year US Treasury futures.

He explained: “We expect the demand for duration assets will remain in place, meaning longer duration assets could benefit. With central banks printing money to buy bonds and pushing up prices, one impact is the creation of a global term premium. We have been modestly adding duration at the back end of the yield curve in the form of longer maturity bonds (30-year US Treasury futures). Meanwhile, in order to hedge the interest rate risk at the front end, we maintain a short position in five year US Treasury futures. This is a play on the term structure of interest rates through time, which we think will get flatter and flatter. Many investors haven’t fully recognised the importance of this dynamic and the corresponding need for diversification.”

Risk Assets

Thirdly, he embraces risk assets that provide a good yield. His portfolio holds high yield bonds, emerging market equities, emerging market debt, preference shares and convertible bonds amongst other things.

He outlined why: “We are broadly biased towards risk assets in our global asset allocation, on the basis that the macroeconomic backdrop should provide a continued benign environment.

“The long-term economic impact of the ECB’s QE programme may be debatable, but in the immediate term it will benefit any investments that pay a yield. Investors should take heed of the maxim ‘don’t fight the central bank’ and should remain risk positive. Our overall exposure to global equities currently makes up nearly half of the fund and we continue to think developed market equities are the best place to look, as equity income currently makes up the most attractive part of the capital structure.”

Learn more

If you’d like to learn more about Quantitative Easing, read these two articles:

European QE: why it can’t work – it explains why it won’t help revive the European economy

Quantitative Easing: what it is and how it works – it explains the dangers of QE to an economy

 

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Tags: European QE

About Author

Christopher Menon

Every Investor Editor Chris Menon is a financial journalist who has written regularly for national newspapers, magazines and websites about personal finance, with particular emphasis on investing.