JPMorgan's Standout Fund Bets on Emerging-Market Stocks Over Bonds

  • Fund is focusing on growth outside the U.S. as data improves
  • Expects stabilized commodities and dollar trading "sideways"

A JPMorgan Chase & Co. fund that trounced its competitors last year is betting emerging-market equities are poised to catch up with U.S. stock gains.

The investment bank’s Global Income Fund, with $20 billion split among multiple asset classes, has been taking on developing-nation stocks and unloading bonds since last year on the view that commodity prices have stabilized and the U.S. dollar won’t rally further, according to Jakob Tanzmeister, a London-based portfolio manager.

"We are more positive on emerging markets today than at any point in the last three years," Tanzmeister said in an interview in Sao Paulo, where he was visiting clients. "Earnings growth rates have turned sharply up in emerging markets."

Equities have more room to rise than bonds on the back of an improved economic growth, according to Tanzmeister. As the U.S. equity rally stalls amid doubts about President Donald Trump’s ability to implement broad tax reform, developing markets are surging ahead along with earnings estimates, helping temper the negative impact of political instability flaring up in the Korean Peninsula, Turkey, South Africa and Venezuela.

"Because the manufacturing cycle is turning up, where you want to be is more at the bottom of the capital structure," said Tanzmeister, whose fund is overweight on Asian stocks and long on the Brazilian real versus the Mexican peso. "You want to be owning equities instead of debt."

Holdings of developing-nation equities in his Global Income Fund has increased to 5 percent of the total portfolio from 0.9 percent a year ago. Meanwhile, emerging-market bonds declined to 2 percent from 5.5 percent. The fund beat 84 percent of its peers last year, according to data compiled by Bloomberg.

Most of the fund’s emerging-market equity investments are in Asian companies. The Chinese economy is "maturing" and strong growth in wages is supporting higher consumption. Tanzmeister said his fund may also pick up shares in Brazil, as the central bank is expected to continue cutting interest rates to boost the economy.

"I hear more and more people saying they should be owning equities in Brazil," he says, adding he favors dividend-paying stocks and larger companies such as beer maker Ambev SA. "Those should benefit from lower rates."

The JPMorgan Global Income Fund returned 6.9 percent in 2016, compared with an average of 3.2 percent for its peers, according to data compiled by Bloomberg.

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