JPMAM ’ s Malcolm : Bad news has already been factored into markets
Edward Malcolm , head of UK ETF distribution at JPMAM , speaks to Tom Eckett , editor at ETF Stream , about the key takeaways from the survey results and the firm ’ s market outlook for 2023
What are your key takeaways from these survey results ?
The survey revealed that the direction of travel for markets is pretty muted . This is no surprise given the year we have had with high inflation , geopolitical tensions and heightened volatility .
For me three things were interesting to see . Firstly , the massive shift in allocation to ESG strategies that we have seen in recent years might start to decelerate . Of course , ESG and sustainable investing is still a highly relevant topic . But 60 % of investors said that they would not allocate more , or maintain their position , to ESG ETFs . While more than 40 % of ETF investors still think 2023 will be the ‘ year of ESG ’, more than 50 % do not agree or are unsure – only 8 % anticipated allocating significantly more towards ESG ETFs in the next year . Having enjoyed 60 % of the inflows this year , it will be interesting to see how investors allocate in 2023 .
Secondly , the survey also revealed that investors are still cautious on emerging markets . With regards to China , over 60 % said that they do not expect their allocation to China to grow next year . The same can be said for broader EM investments . Respondents clearly showed that they see more opportunities in developed markets over EM . We think valuations in EM look very compelling , well below their longterm average since 1990 . This could be an attractive entry point if the macro picture looks more promising and investors can select strategies carefully .
And , thirdly , there seems to be a positive sentiment around active management for the year ahead . Some 57 % of respondents agree that 2023 will be the year of active and only 23 % disagree . We tend to agree with this , because with the end of free money , greater two-way risk in inflation and policy and increased return dispersions across assets , it gives active managers more opportunity to add value . Therefore , this could be a good time for investors to look at active ETFs , which combine the benefits of the ETF wrapper with the opportunities of active management .
It seems investors are relatively sanguine on the outlook for 2023 and concerned about an incoming recession . Do you share these sentiments internally ?
We believe that a lot of the bad news for 2023 has been factored into markets , with a moderate recession already priced in . Our base case for 2023 should ultimately be positive for stocks , with moderating inflation allowing the central banks to pause rate hikes and resulting in a relatively mild downturn . Yet with still significant uncertainty around how quickly inflation will improve , further challenges remain likely ahead .
Across fixed income , this year ’ s sell-off has created opportunities
Chapter 1 : Survey results
across the board . In recent times , bonds have provided neither of the two characteristics that they should – income and diversification . Both aspects are now much improved .
For 2023 , all eyes will be on inflation moderating . If inflation remains persistent around current levels , this could dampen our outlook . Fortunately , we believe there are already convincing signs that inflation is set to moderate . In which case , both stocks and bonds look increasingly attractive . We are more excited about bonds than we have been in over a decade .
How do you see the active ETF market developing in Europe over the next 12-18 months ?
We firmly believe that Europe will follow the US market and that active ETFs will gain more market share .
Some 32 % of survey respondents said they will increase their allocation to active ETFs in this timeframe while 10 % will increase an existing allocation but 22 % of the ETF buyers we asked stated they will start allocating to active ETFs for the first time .
Similar results have come out from other ETF surveys . For those investors that prefer the transparency and flexibility of the ETF wrapper but also want to achieve alpha , we firmly believe that active ETFs will play a role in the further growth and adoption of ETFs .
Edward Malcolm
Head of UK ETF distribution at JPMAM
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