Solving for Fixed Income

Transcription

1 MARKET INSIGHTS 4Q 2016 Solving for Fixed Income Using Market Insights to achieve better outcomes

2 SINCE 2004, J.P. MORGAN HAS PRODUCED MARKET INSIGHTS TO HELP INDIVIDUAL INVESTORS UNDERSTAND AND MAKE THEIR WAY THROUGH RAPIDLY SHIFTING MARKETS. TODAY, EVEN WITH YIELDS TOUCHING HISTORIC LOWS, WE BELIEVE FIXED INCOME HAS A VITAL ROLE TO PLAY IN DIVERSIFYING PORTFOLIO RETURNS, HELPING TO PRESERVE PORTFOLIO VALUE AGAINST VOLATILITY AND PROVIDING A RELIABLE SOURCE OF INCOME. SOLVING FOR FIXED INCOME TAKES A LOOK AT HOW THE CURRENT ENVIRONMENT HAS AFFECTED FIXED INCOME S TRADITIONAL ROLE AND THE MANY OPPORTUNITIES WE SEE TO ACHIEVE ITS TRADITIONAL OBJECTIVES.

3 SOLVING FOR FIXED INCOME 1 WHAT IS FIXED INCOME? 6 GLOBAL INVESTMENT GRADE BONDS 2 LOW RETURNS FROM CASH 7 HIGH YIELD BONDS 3 THE IMPORTANCE OF INCOME 8 ASIAN BONDS 4 MOVING BEYOND GOVERNMENT BONDS 9 RANGE OF FIXED INCOME SOLUTIONS 5 GLOBAL FIXED INCOME OPPORTUNITIES 10 DIVERSIFICATION REMAINS KEY

4 SOLVING FOR FIXED INCOME 1 WHAT IS FIXED INCOME? Fixed income investments Fixed income investments come in various forms. Fundamentally, they are bonds issued by corporations and governments to finance projects or activities. A bond is a loan that investors make to the bond s issuer. In return, the issuer will pay the investor a fixed amount of interest on a regular basis until a predetermined maturity date. At maturity, the issuer promises to return the principal amount of each bond to the investors. 1 USING MARKET INSIGHTS TO ACHIEVE BETTER OUTCOMES

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6 SOLVING FOR FIXED INCOME 2 LOW RETURNS FROM CASH Cash drag is real Cash is not king with respect to long-term investment returns. Annual real deposit rates since the Global Financial Crisis in 2008 have been minimal for Asian countries, or even negative for some. So despite yields at record low levels today, they are still higher than cash returns. In addition, fixed income plays an essential role in diversifying investment portfolios. 3 USING MARKET INSIGHTS TO ACHIEVE BETTER OUTCOMES

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8 SOLVING FOR FIXED INCOME 3 THE IMPORTANCE OF INCOME Maximize investment growth with bonds Total return on fixed income investments consists of two components: price appreciation and coupon return. Coupon income can offset the risk of price declines and serve as a critical buffer for portfolios. And in the current low yield environment, coupon returns can help meet investors income needs. 5 USING MARKET INSIGHTS TO ACHIEVE BETTER OUTCOMES

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10 SOLVING FOR FIXED INCOME 4 MOVING BEYOND GOVERNMENT BONDS Falling policy rates Faced with mediocre growth momentum, falling inflation expectations and an uncertain political situation, major central banks are opting for more unconventional forms of monetary stimulus. As a result, markets expect policy rates to rise at a very slow pace in the future. Searching for higher yields The unconventional monetary policy is pushing a significant portion of developed markets government bonds down into low or even negative yield territory. As a result, investors are moving beyond government bonds in search of higher yields. 7 USING MARKET INSIGHTS TO ACHIEVE BETTER OUTCOMES

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12 SOLVING FOR FIXED INCOME 5 GLOBAL FIXED INCOME OPPORTUNITIES Wide range of opportunities The fixed income market is diverse, spanning a range of securities that perform differently as markets evolve. Their varying characteristics can play an important role in portfolio diversification. No one type of fixed income security has consistently outperformed or underperformed over the past few years. The different types of fixed income securities are characterized by their varying sensitivities to interest rates (i.e., duration) as well as their yield levels, which result in differing performance. Investors thus have a wide variety of fixed income choices to allocate to their portfolios in varying market conditions. 9 USING MARKET INSIGHTS TO ACHIEVE BETTER OUTCOMES

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14 SOLVING FOR FIXED INCOME 6 GLOBAL INVESTMENT GRADE BONDS The safety of investment grade bonds Investment grade bonds are corporate bonds with a relatively low risk of default, and thus lower bond yields. However, they still have higher returns than cash in the current environment. A selective approach today can enhance the stability of returns from investment grade bonds, as we are seeing stabilization in earnings growth and credit fundamentals of the overall corporate bond market (excommodities). 11 USING MARKET INSIGHTS TO ACHIEVE BETTER OUTCOMES

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16 SOLVING FOR FIXED INCOME 7 HIGH YIELD BONDS Taking advantage of higher yields High yield bonds have a rating below investment grade. They offer more yield to compensate for their greater credit risks. These bonds continue to help investors achieve higher yield amidst the current low yield environment. Of particular note, the default rate for U.S. high yield bonds remains below the long-term average despite spreads being wider. In addition, the credit fundamentals of U.S. high yield issuers have stabilized over the years. 13 USING MARKET INSIGHTS TO ACHIEVE BETTER OUTCOMES

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18 SOLVING FOR FIXED INCOME 8 ASIAN BONDS Resilience amid volatility Asian sovereign, investment grade and high yield corporate debt have enjoyed strong returns despite bouts of volatility over the past 10 years. On a risk-adjusted basis, Asian bonds have performed relatively well as compared to Asian and global equities. This highlights the benefits of including Asian bonds as a key diversifier in a portfolio. 15 USING MARKET INSIGHTS TO ACHIEVE BETTER OUTCOMES

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20 SOLVING FOR FIXED INCOME 9 RANGE OF FIXED INCOME SOLUTIONS Solutions for varying risk/return profiles The fixed income universe offers a broad range of solutions for investors at varying levels of risk. Across the spectrum, fixed income generated higher returns than cash over the past 10 years. Investors willing to take on higher risks are compensated with higher returns. In the current macroeconomic environment, with cash returns expected to stay low, fixed income solutions should continue to serve as better alternatives to cash. 17 USING MARKET INSIGHTS TO ACHIEVE BETTER OUTCOMES

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22 SOLVING FOR FIXED INCOME 10 DIVERSIFICATION REMAINS KEY Why diversification works Fixed income investments diversify portfolios because they generally exhibit low correlation to other asset classes. A well-diversified portfolio, including equities and fixed income, returned a respectable 5.7% per year with modest annualized volatility of 12.1% over the past decade. This illustrates the importance of diversification in providing enhanced risk-adjusted returns. 19 USING MARKET INSIGHTS TO ACHIEVE BETTER OUTCOMES

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24 The Market Insights program provides comprehensive data and commentary on global markets without reference to products. It is designed to help investors understand the financial markets and support their investment decision making (or process). The program explores the implications of economic data and changing market conditions for the referenced period and should not be taken as advice or recommendation. The views contained herein are not to be taken as an advice or a recommendation to buy or sell any investment in any jurisdiction, nor is it a commitment from J.P. Morgan Asset Management or any of its subsidiaries to participate in any of the transactions mentioned herein. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and determine, together with their own professional advisers, if any investment mentioned herein is believed to be suitable to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yield may not be a reliable guide to future performance. J.P. Morgan Asset Management is the brand for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. This communication is issued by the following entities: in the United Kingdom by JPMorgan Asset Management (UK) Limited, which is authorized and regulated by the Financial Conduct Authority; in other EU jurisdictions by JPMorgan Asset Management (Europe) S.à r.l.; in Hong Kong by JF Asset Management Limited, or JPMorgan Funds (Asia) Limited, or JPMorgan Asset Management Real Assets (Asia) Limited; in India by JPMorgan Asset Management India Private Limited; in Singapore by JPMorgan Asset Management (Singapore) Limited, or JPMorgan Asset Management Real Assets (Singapore) Pte Ltd; in Taiwan by JPMorgan Asset Management (Taiwan) Limited; in Japan by JPMorgan Asset Management (Japan) Limited which is a member of the Investment Trusts Association, Japan, the Japan Investment Advisers Association, Type II Financial Instruments Firms Association and the Japan Securities Dealers Association and is regulated by the Financial Services Agency (registration number Kanto Local Finance Bureau (Financial Instruments Firm) No. 330 ); in Korea by JPMorgan Asset Management (Korea) Company Limited; in Australia to wholesale clients only as defined in section 761A and 761G of the Corporations Act 2001 (Cth) by JPMorgan Asset Management (Australia) Limited (ABN ) (AFSL ); in Brazil by Banco J.P. Morgan S.A.; in Canada for institutional clients use only by JPMorgan Asset Management (Canada) Inc., and in the United States by JPMorgan Distribution Services Inc. and J.P. Morgan Institutional Investments, Inc., both members of FINRA/SIPC.; and J.P. Morgan Investment Management Inc. In APAC, distribution is for Hong Kong, Taiwan, Japan and Singapore. For all other countries in APAC, to intended recipients only. Copyright 2016 JPMorgan Chase & Co. All rights reserved. MI-Fixed Income Principles_4Q16_ASIA c441ed e6-9c c63