Corporate Credit Weathers Bank Turmoil, Says JPMorgan Asset Management‍

Despite bank failures on both sides of the Atlantic, J.P. Morgan Asset Management chief investment officer Jed Laskowitz believes that high-grade corporate bonds can weather the storm.

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Laskowitz told Trade Algo that he has an overweight position in his multi-asset portfolio that is mostly funded from cash. It is likely to be the largest allocation ever in his multi-asset portfolio. In an economy where growth is slow and earnings remain uncertain, it offers returns.

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In his big-picture view, he believes that while much still needs to be done in the banking sector, authorities will act quickly so as not to spread contagion. A Trade Algo index of global credit shows that company bonds yield almost twice as much as their average since 2018, making valuations more attractive after the selloff.

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Treasuries declined as fears of broader shake-out eased as gains in financial stocks cautiously lifted global stocks.

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However, there are still risks involved. As Laskowitz said, the threat of a hard landing has increased in the US, even though the Federal Reserve's statement after last week's rate hike suggested the end of tightening was approaching. In terms of equities, he is largely neutral, preferring European and emerging-market stocks, such as China, to those in North America. 

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“It's important to be aware of the possibility of capitulation at the wrong time, which tends to happen with investors, which is to sell at the bottom of a market and buy at the top of a market,” Laskowitz, who is also the firm's head of asset management solutions, stressed. “There is an obvious and present threat to the financial system in this situation, but the events have been isolated and handled swiftly. Therefore, we feel that stability is sufficient.”

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'We're not there yet'

He, along with his team of analysts are closely watching how lending standards, including credit card balances, are being tightened by the Fed in a manner that is unprecedented in at least 40 years, and how this impacts consumers, small businesses, and commercial real estate.

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According to him, for now, those risks are not enough to justify taking an underweight position in equities. Despite the fact that the Fed is tightening and we are entering a deeper recession, we do not have to ignore the opportunities. The risk is that if we do, we might enter a deeper earnings recession. But we are still far from that point.”

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A key factor in Laskowitz' recent interest in investment-grade bonds has been his belief that the Federal Reserve will moderate its tightening pace in order to avoid "breaking the back" of the economy in order to control inflation during the rest of this year. 

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The relative-value decisions he has made in equities include buying European stocks and underweighting US stocks. If inflation eases and earnings expectations improve in response to better growth, he will consider shifting to a position of overweight if he prefers big caps to small companies. 

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He has extended the maturity profile of government bonds and some of his portfolios are overweight in duration. He is buying intermediate investment grade credit that generates 125 to 150 basis points over 5-year Treasuries. 

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It is also a plus for investors that a negative correlation has returned between stocks and bonds. According to JPMAM data, balanced investors — those who allocate 60% of their assets to equity and 40% of their assets to bonds — suffered a rough year last year as stocks and bonds declined at the same time for the first time since 1974. Consequently, bonds couldn't cushion equities losses.

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In a volatile equity market, investors should use the ballast that bonds provide to navigate a volatile equity market. “Bonds are part of the solution, not the problem,” he said.