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Global financial services giant JP Morgan has thrown its weight behind European equities and high-yield bonds against other assets for this year, saying that volatility in world markets and relatively affluent liquidity ahead will push investors to hunt for high yields.

Tai Hui, Asia chief market strategist at JP Morgan Asset Management, said developed market companies, especially European firms focusing on domestic markets, are expected to see better earnings in 2016, given the buoyant growth in the economy.

"Even the once PIIGS countries are showing a steady trend of recovery," Hui said in Hong Kong on Monday, using the acronym for the euro zone nations of Portugal, Italy, Ireland, Greece and Spain, which were seen as economically weaker following the 2008 financial crisis.

However, with many European companies being export-driven and emerging markets like China facing a challenging year, he suggested that investors stick to names with a large European domestic market exposure.

Although the US Federal Reserve has hinted it might raise rates four times this year, Hui said the expectation is for rates to be lifted two to three times at the most, given that "recovery usually wouldn't be that smooth".

With the European Central Bank and the Bank of Japan likely to continue quantitative easing this year, global liquidity will "remain affluent" and rates "remain low", which will keep investors searching for yields.

Despite favoring developed markets over emerging ones, Hui said Japanese equities may lose steam slightly this year provided it becomes increasingly harder for the Japanese yen, one of the market drivers, to be even cheaper.

Since April 2011, the yen has weakened 33 percent against the US dollar. However, the Japanese currency has appreciated by 5.05 percent against the greenback since December, as market volatility pushes investors to cover shorts on the yen. "It will affect corporate earnings growth," he said.

Separately, the asset manager said high-yield bonds in the US, Asian and emerging markets are becoming attractive following market corrections in the second half of last year.

"The current default rate of US high-yield bonds is 2.4 percent, compared with an average of 4 percent since 1990. Meanwhile, the yield spread of US high-yield bonds had reached 757 basis points late last year - higher than the three-year average of 514 basis points. We believe ex-energy sector US high-yield bonds are attractive," Hui said.

He recommended that investors keep their portfolios diversified across asset classes and markets this year to ride out the volatility ahead. "It would be better to have both equities and fixed income in the portfolio, but the proportions of different assets would depend on investors' risk appetite."

Meanwhile, JP Morgan Asset Management has found in a survey that local investor confidence has improved with the confidence index strengthening from 95 in the third quarter of last year to 107 in December. One in five investors, or roughly 20 percent, planned to be "more aggressive" as of the end of last year, compared with just 8 percent in September.

The survey, conducted in December, interviewed 512 Hong Kong investors with more than HK$100,000 liquid assets and at least five years of continuous investment experience.

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JP Morgan Asset Management says a survey of 512 Hong Kong investors with more than HK$100,000 liquid assets and at least five years of continuous investment experience shows that local investor confidence has improved, with the confidence index strengthening from 95 in the third quarter of last year to 107 in December. One in five investors, or roughly 20 percent, planned to be "more aggressive" as of the end of last year, compared with just 8 percent in September. Bobby Yip / Reuters

(HK Edition 01/19/2016 page8)