Today's climate of full valuations and low yields is forcing investors to work their way down through the asset classes.
This is according to Alex Christie, vice president institutional solutions and advisory at JP Morgan, speaking at the latest ISAG (Investment Strategist’s Association of Geneva) meeting.
Christie explained that a 60/40 portfolio in 2017 will be less exposed to volatility than it was during 2016, but will also generate lower compound returns on average, according to data in CHF.
The research behind this comes from JP Morgan's 2017 Long-Term Capital Market Assumptions, which Christie co-authored.
Heading down the stack
This means investors have been pushed to invest one notch down on the ‘capital stack’, which he explained was formed by asset classes ranging from the least risky (government bonds) at the top all the way down to the most volatile: real assets and equities.
‘Investors who were invested in government bonds would now be invested in investment grade bonds. Where before they used to invest in investment grade bonds, now they will going into credit or high yield.
‘Where they used to be in those asset classes, they will be going into possibly equities. And now equity investors could be going into real assets,’ he said.
However, Christie argued credit, emerging market equity and debt, and high yield bonds will remain attractive going into the new year, and will become increasingly mainstream.
Real and illiquid assets are also set to gain traction as investors search for yield.
Although volatility is expected to decline over the course of 2017, it was still in evidence at the ISAG event.
Patrice Gautry, chief economy at UBP, noted increased ‘volatility’ from the CIO of SYZ Asset Management, Fabrizio Quirighetti, who knocked over a platter on the table.