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For higher returns go global, says JP Morgan strategist

Emma Rapaport  |  10 Jul 2018Text size  Decrease  Increase  |  
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Globes Investing Equities

Australian equities remain a key part of any portfolio but JP Morgan global market strategist Kerry Craig is urging investors to look overseas to access higher returns.

Addressing a media roundtable in Sydney on Tuesday, Craig noted the pronounced second-quarter rally in Australian markets, returning 8.5 per cent year-on-year, but wondered whether there was still steam in the market.

"Aussie investors, you did really well in the last quarter because the currency moved in your favour (to a large extent) and there was a big swing in positioning from being short Australia to being long," Craig said. "The question we have to ask ourselves now is 'is this growth going to continue?'

"When we think about where we are in the cycle and what drives returns it's going to be earnings. While we're seeing upgrades to earnings in Australia, there's still a large gap between that and what you're seeing in the rest of the world."

On the domestic front, Craig notes several weaknesses in the economy, which he says are leading to a dislocation between Australia and the rest of the world. He says risks in the housing market, for instance, could become more prevalent if bank funding costs start to rise and those costs are passed onto consumers through higher mortgage rates.

Will Australia's housing market crash? Craig thinks not but he does predict a "cooling". He also expressed concerned about a sharp rise in household debt, describing it as "the canary in the coal mine".

JP Morgan's forward earnings expectations show the ASX 200 delivering high single-digit returns over the next year of about 6 per cent, driven largely by dividends and growth. However, these projections trail both the Standard & Poor's 500, tipped to deliver closer to 14.5 per cent, and the Tokyo Stock Price Index.

"We think there's good scope for Australian equities, but we still believe that going global is where you drive the higher returns in the portfolio," Craig said.

JP Morgan Charts Australian Equities

Source: FactSet, Standard & Poor’s, J.P. Morgan Asset Management. Guide to the Markets – Australia. Data as of 30 June 2018.

Time to go active in emerging markets

Craig also signals opportunities for investors in emerging markets, citing high levels of demand among Asia's growing middle class. However, with the escalation in US-China trade tensions, he recommends investors steer clear of passive management.

"In this current climate, investors need to drill down into sectors rather than focus on a country basis because a lot of the trade tensions which come through are so targeted at specific certain industries or certain companies," Craig said.

"Because of that I think investors need to be very active in terms of how they position in emerging market. I wouldn't recommend being passive (going into an ETF) because you're going to get too much of the bad news and too much of the risk."

By way of example Craig cites non-exporting Chinese companies focused on domestic demand – for example, healthcare. "That's where you've really got to know what you're doing locally to be able to take advantage of growth with a stock up position.

"I think an active position in emerging markets is much more warranted given the nature of trade wars and the risk coming through."

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Emma Rapaport is a reporter for Morningstar Australia

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