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Many Singaporeans are understandably concerned about the rising cost of living due to persistent inflation. Over the past two years, basic necessities such as food, public transport, and even electricity and water bills have risen, and we are all looking for ways to stretch the value of a dollar.
Homeowners may also find themselves forking out more for their monthly home loans as central banks hike interest rates to combat inflation.
Continued disruptions in global supply chains have exacerbated uncertainties while keeping inflation elevated. Some international companies are also looking to diversify their supply chains outside of China, even at higher costs.
The protracted conflict in Ukraine coupled with the unrest in the Middle East have further intensified cost pressures and increased geopolitical risks.
It’s little surprise then that the stock market has become volatile, with sticky inflation and resilient growth stoking expectations of a higher for longer interest rate environment.
Staying Out Of The Markets Might Not Be The Solution
The argument for investors to continue ploughing money into the financial markets, regardless of the market situation, is not ground-breaking.
We should take a long-term view to growing our portfolio rather than become distracted by near-term market conditions. In fact, we ought to seek opportunities to invest at more attractive valuations when sentiments are challenged, based on our investment objectives and risk appetite.
Rather than exit the markets at inopportune moments – during a correction—market volatility can present opportunities for both stocks and bonds. With the Federal Reserve (Fed) raising interest rates at an unprecedented pace, bond yields across different sectors have risen to levels unseen over the last decade.
More importantly, staying out of the market and holding cash is not likely to be helpful in beating inflation. Opting for lower-risk government bonds or treasury bills (T-bills), while popular, locks us into risk-free rates for a period of time. Aside from missing out on any potential gains from any market upswing, we also lose the flexibility to make opportunistic investments.
Finding A Middle Ground In Income Investing
Despite knowing the advantages of staying invested and investing more, it is understandable that investors are feeling uncertain about the current market environment. This is where investments that generate income may present a good middle ground.
For a start, dividend-paying stocks tend to be backed by higher-quality and more defensive businesses. Compared to high-growth businesses that may not pay out dividends, certain dividend-paying stocks could continue to help maintain payouts through the ebb and flow of the macro-economic environment.
Such businesses can exhibit a solid long-term track record, having navigated economic downturns over the years. They also have visible cash flows to maintain dividend payments during economic downturns and/or when operating in a high-inflation environment.
For these reasons, dividend-paying stocks have historically been less volatile compared to growth stocks and even the broader market index.
High-dividend stocks tend to exhibit lower volatility relative to their growth peers. It has also outperformed the broader index over the last two years.
Source: Bloomberg, J.P. Morgan Asset Management. Data as of 31.10.2023. Global equities represented by MSCI All Country World Index (MSCI ACWI). Global high dividend equities represented by MSCI ACWI High Dividend Yield Index. Global growth equities represented by MSCI ACWI Growth Index. Provided for information only to illustrate macro trends, not to be construed as research or investment advice. Investments involve risks. Not all investments are suitable for all investors. Indices do not include fees or operating expenses and are not available for actual investment. Past performance is not indicative of current or future results. Yield is not guaranteed. Positive yield does not imply positive return.
The chart on the left shows global dividend stocks (in blue) exhibiting lower volatility across various time horizons. Whereas, the chart on the right shows dividend stocks have also outperformed growth stocks and global stocks over the past two years – when volatility was higher.
Income can also come from bonds. With Singapore T-bills yielding near the 4% handle, some investors may find them attractive. Alongside the rise in risk-free rates, the yield on investment-grade and high-yield corporate bonds has also risen. And, in addition to higher income, bonds can also present opportunities for capital gains should interest rates dip.
Source: Bloomberg, FactSet, J.P. Morgan Credit Research, J.P. Morgan Asset Management. Data as of 31.10.2023. US Treasuries: Bloomberg US Treasury Index; US IG: Bloomberg US Corporate Index; US MBS: Bloomberg US Mortgage-Backed Securities (MBS) Index; US ABS: Bloomberg Asset-Backed Securities Index; Europe IG: Bloomberg Euro Aggregate Corporate Bond Index; USD EMD: J.P. Morgan Emerging Market Bond Index (EMBI) Global Diversified Index; Local Emerging Market Debt (EMD): J.P. Morgan GBI-EM Global Diversified Index; EM Corporates (Corp): J.P. Morgan Corporate Emerging Market Bond Index (CEMBI) Broad Diversified Index. Europe HY: Bloomberg Pan European High Yield (HY) Index; US HY: Bloomberg US Corporate High Yield Bond Index. All sectors shown are yield-to-worst. Yield-to-worst is the lowest possible yield that can be received on a bond apart from the company defaulting. Past performance is not indicative of current or future results. Indices do not include fees or operating expenses and are not available for actual investment.
Looking at the chart above, we can also see that bond yields across many fixed-income sectors are currently near their 10-year highs.
In a sense, income investing can help capture the broader market upside while providing some buffer through cash flows to help ride out volatile times.
Not The Time To Throw Caution To The Wind
While higher yields on fixed-income securities and dividend stocks can be attractive, we should also be mindful of the risks involved and not simply throw caution to the wind.
We need to strike a balance in our portfolio – managing downside risks while also positioning the portfolio to take advantage of potential market upswings. A first step is the “good night’s sleep” test. We should understand our risk appetite and only make investments that allow us to have a good night’s sleep. If we lay in bed worrying about potential losses, it means we are investing in something too risky for our liking.
Of course, we also need to be aware of what we are investing in.
Income Opportunities Come In Many Shapes And Colours
There are many different ways to access income opportunities in a diversified manner. Depending on one’s risk appetite, investors can choose to invest in a global multi-asset portfolio that is diversified across asset classes such as equities and bonds, as well as regional markets.
For example, the JPMorgan Global Income Fund scours the globe to seek out attractive income opportunities across asset classes, sectors and the full breadth of the capital structure. The result is a highly diversified portfolio with exposure to over 3,000 individual securities in over 90 markets.
The JPMorgan Global Income Fund invests flexibly in income-producing securities across regions, asset classes and capital structures.
Source: J.P. Morgan Asset Management.
Sustainable Income Could Be The Way Of The Future
Investors can also seek out income opportunities with a sustainability lens. This is often done by applying an environmental, social and governance (ESG) criteria in the investment process. A serious consideration of ESG factors in the investment process can be useful to help manage risks and tap into opportunities for long-term growth.
Companies that handle ESG factors effectively tend to be more efficient, profitable and resilient. Generally, these companies tend to be less volatile and less exposed to regulatory or reputational risks, versus those that do not manage these risk factors well. Seeking out such higher-quality opportunities can help manage downside risks during tough market environments, hence bolstering portfolio resilience.
Moreover, companies leading the sustainability charge, typically by finding new ways to address environmental and social challenges, can present green shoots for long-term capital growth. Tapping into these opportunities can help increase the value of a portfolio over time. However, given the attendant risks of these businesses, having a rigorous investment process in place matters to ensure exposure to quality and enduring opportunities.
A strategy like the JPMorgan Global Income Sustainable Fund rigorously applies three pillars of sustainability in its pursuit of income opportunities.
The Fund is built on three pillars of sustainability
Source: J.P. Morgan Asset Management
Note: J.P. Morgan Asset Management defines ESG integration as the systematic inclusion of financially material ESG factors (alongside other relevant factors) in investment analysis and investment decisions. It involves proprietary research on financial materiality of the ESG factors in relation to the relevant company/issuer and discretion to invest regardless of whether the company/issuer may be positively or negatively impacted by the ESG factors. Integration of ESG factors does not imply ESG factors as the sole investment focus. Risk management does not imply elimination of risks. In actively managed assets deemed by J.P. Morgan Asset Management to be ESG integrated under our governance process, we systematically assess financially material ESG factors including sustainability risks in our investment decisions with the goals of managing risk and improving long-term returns. Please refer to the offering documents for more details on the ESG approach.
^Please refer to the offering documents for more details on the current exclusion policy. Exclusion criteria are subject to periodic changes without advance notice. Exclusion does not necessarily mean zero exposure and company revenue thresholds apply.
The fund taps into a wide opportunity set including 7 sustainable income asset classes, across 35+ markets and 1,200+ individual securities, seeking to do well by doing good.
The JPMorgan Global Income Sustainable Fund taps into a wide opportunity set for sustainable income
Source: J.P. Morgan Asset Management.
Income Funds: A Buffer In Tough Times, A Launchpad In Good
In essence, cash flow from income-generating assets in the form of dividends from stocks or coupons from bonds, while not guaranteed, can provide a cashflow buffer for portfolios in uncertain times.
A regular income can be put to good use – regardless of the stage of life we are in – to re-invest, to put towards an annual holiday or even to set aside as dry powder for lucrative investment opportunities.
In the event of a market recovery, our exposure to the stock markets will enable us to ride the upswing.
To find out more about the two funds above, we can visit their respective fund overview pages:
JPMorgan Global Income Fund is the marketing name of the JPMorgan Investment Funds – Global Income Fund.
JPMorgan Global Income Sustainable Fund is the marketing name of the JPMorgan Investment Funds – Global Income Sustainable Fund.
Singapore ESG Fund: The Sub-Fund is an ‘ESG Fund’ in accordance with Section A of Circular No. CFC 02/2022: Disclosure and Reporting Guidelines for Retail ESG Funds issued by the MAS, it complies with the requirements in Section B of the MAS ESG Circular and is deemed to have complied with Section C of the said circular. Please refer to the offering documents for further details.
Diversification does not guarantee investment return and does not eliminate the risk of loss.
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