Shift focus in investments by tilting portfolios towards value-based equities.
In a recent meeting, Paul Quinsee of J.P. Morgan Asset Management proposed a balanced investment strategy, combining value stocks and selective exposure to emerging technology segments like cloud computing, online retail, and streaming services. This approach aims to navigate the challenging valuations in the fastest-growing U.S. companies.
Quinsee emphasised the attractiveness of value stocks, which boast more reasonable valuations compared to high-growth stocks, particularly in tech-focused sectors. However, investors should be mindful of the valuation premium often associated with emerging technology sectors.
J.P. Morgan's portfolio construction strategy involves sorting stocks based on trend growth within sectors and weighting them by their S&P 500 market value, ensuring a balance between growth and value exposure.
The corporate profit recovery is above average, with earnings increasing by around 12% in the first quarter and an even stronger recovery expected for the second quarter. Undervalued value stocks currently have a P/E ratio of 11.
Investors are encouraged to include not only technology-driven growth companies but also value companies that are benefiting from the recovery. While inflation is a macroeconomic factor, it does not necessarily mean profit losses for companies. Historically, periods of high inflation have been supportive of value stocks.
Quinsee also highlighted that some expectations about the future earnings potential of growth companies may be disappointed. As a result, it's crucial to approach segments like growth stocks with caution, as they seem expensive.
The strong momentum in the corporate sector, combined with continued support programs and accommodative monetary policy, keeps the outlook positive for the second half of 2021 and 2022. Companies particularly affected by the pandemic, such as banks, cyclicals, industrials, and travel companies, continue to recover and present good opportunities.
It's worth noting that there are around 200 large-cap companies that are not profitable for their shareholders. This underscores the importance of a balanced investment strategy, as equities remain an important asset class, but now is not the time to significantly increase allocation. Instead, selective adjustments are advised.
Quinsee meets quarterly with all portfolio managers of J.P. Morgan Asset Management for a strategy summit, where ideas and insights for different regions and strategies are discussed. This collaborative approach ensures that the firm's investment strategies remain well-informed and adaptable to the ever-changing market landscape.
Personal finance advisors like Quinsee recommend diversifying investment portfolios, incorporating both growth technology stocks and undervalued value companies. However, investors should be cautious when investing in growth sectors, such as cloud computing and streaming services, due to the potential valuation premium.
