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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

© 2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication

is a reporter for Morningstar.com.au

© 2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

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