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What can flexibility do for you?Video

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Transcript: <p>[techno music]</p> <p><b>Mr. Jake Manoukian</b>: Hi, my name is Jake Manoukian. I'm an Investment Strategist at the J.P.Morgan Private Bank. Welcome to the May edition of Markets Monthly. This month, I'm so excited to have Michael Joelson here. Michael, thank you for taking the time.</p> <p><b>Mr. Michael Joelson</b>: Thanks for having me, Jake.</p> <p><b>Jake</b>: Michael runs an unconstrained strategy for us. And I really like this concept... and am excited to discuss it with you just because when we think about investing, we usually think about it in terms of a 60/40 stock/bond mix or even just the stock market. And you don't think about investing like that. So what does this kind of unconstrained approach mean to you, and why do you like it?</p> <p><b>Michael</b>: The way we think about it is it's less about managing to a strategic asset allocation or benchmark like the S&amp;P 500, and more about knowing what your risk budget is and taking a broad approach in investing in all asset classes depending on how attractive they are and generating what we think is the best risk-adjusted return.</p> <p><b>Jake</b>: Right.</p> <p><b>Michael</b>: So it's not about I'm overweight the U.S. versus Europe, it's about pairing U.S. banks, India and gold in an efficient portfolio for clients.</p> <p><b>Jake</b>: Right. So I think that gives you a lot of flexibility to change that positioning, given where you are in a market cycle or a business cycle. So in your estimation, where do you think we are in the business cycle, and how does positioning reflect that?</p> <p><b>Michael</b>: Yeah. So we do feel we're later in the market cycle. We are in the 10^th year of the expansion- unemployment is very low. Wages are rising. The Fed has already hiked nine times. A lot of hay has already been made. And so we do think it's prudent to take a more conservative, more defensive approach into the way you invest. So things like Treasuries, gold and keeping the equity allocation, you know, I would say more moderate- relative to where you might be let's say earlier in the market cycle.</p> <p><b>Jake</b>: So given that you have this kind of broad defensive posture in your portfolio, how do you think the cycle could extend, and what do you think we might do well if the cycle does extend for some time?</p> <p><b>Michael</b>: Right. So we do believe we're later in the market cycle, but we also know that the world is uncertain. And no one knows when the cycle is going to end. So we're open to the possibility that it could extend. And to the extent that it does, we think you want to own positions and investments that are levered to what actually has to play out...</p> <p><b>Jake</b>: Right.</p> <p><b>Michael</b>: ...for the cycle to extend. So we think three things have to happen. Number one: You need to see better productivity in the United States. When we say productivity, essentially what we mean is for every hour worked for the average worker- producing more.</p> <p><b>Jake</b>: Right. So there's two ways you can get growth. You can either add more workers or you can make them more productive.</p> <p><b>Michael</b>: Right. And we've already added a lot of workers over the last 10 years, so now it's about making the workers we have more productive.</p> <p><b>Jake</b>: Okay.</p> <p><b>Michael</b>: And the easiest way for that to happen is for companies to invest in technology. If they're going to be more efficient, it's going to be because the companies that they work for are investing in technology. Another way for the cycle to extend is for China to pick up the baton from the more developed markets. 2018 was a very tough environment for risk assets. China's growth was slowing substantially. 2019, it's the reverse. So China is pumping a lot of money into their economy. They're a centrally planned economy- so they have the ability to do that. And it's not just about owning Chinese equities, it's also about owning other markets that are levered to China. So countries like Japan, Germany, broad Asia, we think they could certainly benefit from some of the dynamics that we're seeing in China on the ground.</p> <p><b>Jake</b>: So what about the Fed? It seems like their pivot from kind of durably hiking to on pause has really been a boon to risk assets so far this year. So what do you see from the Fed going forward?</p> <p><b>Michael</b>: Right on cue, right? The third thing you need to see for the cycle to extend is you need the Fed to remain focused on inflation. And I say that only because we have very little inflation. Right? So as long as the Fed is focused on the fact that we have very little inflation, they'll be less inclined to hike rates. Last year, they hiked rates four times. Four times despite the fact that we had inflation that was at or below target. They did that because they were trying to tighten financial conditions, which is synonymous for equity markets going down.</p> <p><b>Jake</b>: Right.</p> <p><b>Michael</b>: We think that they've pivoted pretty dramatically this year. We need them to stay on that current pivot- and as long as we think that they stay with that pivot, and they remain focused on the fact that they're only going to hike interest rates if inflation picks up, we think it can be a pretty favorable environment for risk assets.</p> <p><b>Jake</b>: I think that just really brings home the compelling nature of this unconstrained strategy because you're barbelling that defensive kind of core positioning with assets that could appreciate if the cycle does extend.</p> <p><b>Michael</b>: Exactly.</p> <p><b>Jake</b>: Great. Michael, thank you so much for the time. I really appreciate it, especially on your birthday. Happy birthday, and thank you all for joining. We hope to see you next month.</p> <p>[END]</p>

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