Photographer: Martin Leissl/Bloomberg

Strategist for $1.7 Trillion in Funds Says Rout Has Room to Run

  • Buy Treasuries as Fed unlikely to rush rate hike, Chow says
  • JPMorgan's Chow sees bright spots in tourism, China e-commerce

Don’t be fooled into thinking the rebound in stocks means we’ve reached the bottom, says Marcella Chow, who watches the world’s markets for JPMorgan Asset Management Inc.

The global strategist for the $1.7 trillion money manager says she’s on edge, her clients are panicky and she’s telling them to increase their exposure to bonds while being selective on equities. She’s personally stashing as much as 70 percent of her own portfolio in bonds including U.S. Treasuries. Calm won’t return until China’s economy improves and central banks regain credibility with investors, she said. She says investors are worried oil may fall to as low as $22 a barrel, so for now she’s battening down and trying to avoid volatility.

Global equities have recouped some losses since the end of last week after a selloff that sent them into a bear market for the first time in five years. Oil has climbed back to near $30 a barrel after plunging to its lowest since 2003, banks have shaken off fears about their ability to repay debt, and monetary policy makers from China to Europe have been speaking out to reassure investors. None of this convinces Chow the worst is over.

“Am I worried? Yes,” Chow said in a Feb. 15 phone interview from Hong Kong. “There’s so much uncertainty,” she said. “Equities might not be a wise choice.”

She does see some bright spots, including e-commerce in China. She’s also keen to look into tourism-related sectors. During Chinese new year, Japan and Thailand saw an influx of visitors, which would benefit service sectors in those countries, Chow said.

Treasuries are the best haven from a rout that wiped almost $7 trillion from global shares this year, said Chow, because the Federal Reserve is unlikely to rush to raise interest rates again soon. Fed Chair Janet Yellen said this month continued market turmoil could throw the central bank off course from the multiple increases it forecast for 2016. A measure of U.S. government bonds has gained 2.3 percent this year.

Most stock indexes in Asia fell on Wednesday, with Japan’s Topix index dropping 1.1 percent and Hong Kong’s Hang Seng Index declining 1 percent.

Gold, which has risen 13 percent in 2016, could easily fall, says Hong Kong-based Chow, who joined JPMorgan last year from Bank of America Corp.’s Merrill Lynch, where she was an economist for emerging Asian countries. She said that past analysis has shown it’s correlated with other commodities. While investors such as KKR & Co. recommend increasing cash as a buffer, Chow says that’s a mistake, too.

“Even though it’s tempting to hold cash given how crazy markets have been, it’s better to go for stable bonds,” Chow said. “At least you can generate a few percentage points in returns.”

Chow says she’s anxious about China’s manufacturing slowdown as the country transforms into a service economy. The official factory gauge signaled a record sixth straight month of deterioration in January. Billionaire investor George Soros said last month the Chinese economy is headed for a hard landing, while hedge fund manager Kyle Bass said the banking system may have losses more than four times those of U.S. banks during the financial crisis.

“China’s growth stabilization story is still unclear,” said Chow. “We have to wait and see what happens.”

Chow says some investors expect oil to fall to $22 to $26 a barrel. “From what I heard, that’s the bottom,” she said. West Texas Intermediate traded at $29.84 as of 7:32 p.m. in Tokyo. Saudi Arabia and Russia agreed Tuesday to freeze output at near-record levels. Oil pared gains after the accord was announced, signaling traders see no immediate end to the global supply glut.

Supply Pressure

Crude markets could “drown in oversupply,” sending prices even lower, according to the International Energy Agency, which trimmed its 2016 estimates of global demand for the commodity last month. About 150 oil and gas companies may go bust as a supply glut pressures prices and punishes revenues, said energy consultant IHS Inc.

“The oil price has picked up a bit but people are still worried it will test new lows,” said Chow. “And with more stories of oil companies and sovereign wealth funds potentially turning insolvent or losing money and jobs, that’s quite a big worry.”

Central banks are running out of ammo, according to Chow, who says she’s lost faith in their ability to calm markets. She points to how quickly the yen reversed declines after the Bank of Japan adopted negative interest rates. That move itself shows the BOJ is running out of options, she said.

Quelling Fears

Central bank heads have been vocal in trying to quell investors’ fears. People’s Bank of China Governor Zhou Xiaochuan broke a long silence in an interview published last weekend, saying the central bank has stepped up efforts to restore stability in the currency and economy. Mario Draghi signaled the European Central Bank would be ready to take action if snags in the banking sector were impeding monetary stimulus.

Chow argues for waiting until policy becomes more effective. With all the worries, she says now is a time to be cautious, park assets in U.S. Treasuries and watch developments.

“How much more down is there to go? I want to know too,” Chow said. “I’m not feeling very adventurous at the moment. It’s too risky.”

(A previous version corrected the second paragraph to clarify that Chow was speaking of her personal stance on bond exposure, and changed the ninth paragraph to show analysis is not from JPMorgan.)

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