PORTFOLIO INSIGHTS

Multi-Asset Solutions Weekly Strategy Report

Global markets and multi-asset portfolios
September 21, 2020

IN BRIEF
• From a portfolio perspective, exposure to tech winners in U.S. equities is not a free
lunch. The same growth stories that prompted outsize U.S. equity returns in recent
years and a faster recovery from the COVID-19 shock make the U.S. a higher volatility,
higher beta market, at least for now.
• The shift is a symptom of rising market concentration, which reflects the potentially
powerful influences of investor crowding, swings in sentiment and high valuations,
along with business fundamentals.
• We still score U.S. equities as an overweight, and like its tech exposure in combination
with cyclical equity markets including emerging markets and Europe.
AUTHORS • Given the S&P 500’s reduced defensiveness, and the fact that bond yields are pinned
down by monetary policy, it has become more difficult to find effective portfolio
hedges.

A NEW ROLE FOR U.S. EQUITIES IN MULTI-ASSET PORTFOLIOS?

In recent years we have been hard-pressed to underweight U.S. equities in our multi-
asset portfolios. When global markets are on the ascent, the S&P 500 rarely lags other
Patrick Schöwitz, CFA regions and oftentimes leads. At the same time, it has historically been a relatively high
Managing Director
quality and low beta index, suggesting a degree of defensiveness in a downturn. The U.S.
Global Strategist
Multi-Asset Solutions has thus been an attractive market both from the perspective of its underlying economic
attributes as well as portfolio diversification.

Has rising stock market concentration upended this unambiguous support for U.S.
equities? Concentration is certainly an acute issue in the S&P 500, which has seen a huge
rise in the proportion of its value accounted by just a handful of megacap tech stocks —
precisely the area of the market that sparked equity volatility over the past few weeks. In
our view, acknowledging this higher concentration and volatility requires an increasingly
balanced approach to investing in the U.S., one weighing the market’s leverage to long-
term growth stories against its more limited defensive characteristics.
Benjamin Mandel
Executive Director
Global Strategist
Multi-Asset Solutions
 MULTI-ASSET SOLUTIONS WEEKLY STRATEGY REPORT

A vulnerability of concentrated markets:
Tech-driven volatility
This year’s U.S. market outperformance and its faster
recovery from the March lows has largely reflected the
strong performance of a small band of popular winning
stocks. Before the volatility that began in early
September, the top five largest stocks in the benchmark
U.S. index accounted for around a quarter of its total
value — an all-time high. Their shares at that point had
risen by over 50% year-to-date, while the overall market
had gained just 11%.
Without taking a view on whether or not these share price
gains were fully justified by long-run business
fundamentals, we believe this rapid rise left the overall
U.S. market heavily exposed to any change in investors’
bullish view on these stocks. And while today’s U.S. tech
champions have successful and highly profitable business
models — many growing their profits throughout the
COVID-19 crisis — the extreme investor crowding has
stoked valuations that seem at least superficially very
high, leaving stock prices vulnerable to swings in
potentially overheated investor sentiment.
Exacerbating the issue has been the role of equity
derivative markets in the U.S. tech- stock run-up. While
U.S. tech stocks had moderately outpaced other regions’
tech sectors for much of this year, this outperformance
accelerated markedly in the latter half of August, before
sharply reversing in September. The tech stock gains
seemingly coincided with increased buying of bullish
exposure through equity options (market participants
continue to debate the extent to which this was driven by
a new wave of retail investors or increased institutional
activity in the space). The surge in options trading also at
least partly explains the odd phenomenon of a strongly
rising equity market alongside metrics of increased
implied volatility, driven by options market pricing. This
was not just a U.S. occurrence, but it was more
pronounced in the U.S. market and at this point, headline
volatility metrics remain elevated compared with other
regions (e.g. VIX at 26, vs. the Eurostoxx V2X at 22), and
even more so in the tech-dominated Nasdaq (VXN at
35%).
To be sure, this is not the first time concentration has
become an issue in the U.S. market. Many investors recall
the late 1990s tech bubble and, back in the 1960s and
1970s, the “Nifty Fifty” group of expensive large cap
stocks that dominated the U.S. equity market. However,
the current degree of concentration exceeds both of those
episodes. More ominously, perhaps, neither of the earlier

EXHIBIT 1: EQUITY MARKET EXPOSURES TO THE ‘WORKING FROM HOME’ (WFH) THEME

Equity market composition can shine Emerging

U.S. China Europe Japan Australia World
a light on which indices are net Markets
beneficiaries of the WFH theme. At
MSCI Eurostoxx MSCI
the industry level, almost half of S&P S&P 500 MSCI EM Topix ASX 200
China 50 ACWI
500 market cap benefits from higher
WFH activity, driven by the hefty Winner 46.7% 32.9% 27.9% 28.5% 32.3% 11.1% 39.5%
weights of software names. In sharp
contrast, WFH loser weights exceed Neutral 37.1% 46.5% 44.9% 39.4% 31.4% 44.8% 39.8%
those of winners in Europe, Japan
and Australia. Loser 16.2% 20.6% 27.2% 32.1% 36.4% 44.2% 20.7%

Winner
30.5% 12.2% 0.6% -3.6% -4.1% -33.1% 18.9%
- Loser
Source: Bloomberg, J.P. Morgan Asset Management Multi-Asset Solutions; data through July 2020.
For illustrative purposes only.

2 Multi-Ass et Solutio ns
 MULTI-ASSET SOLUTIONS WEEKLY STRATEGY REPORT
periods lasted, and in both instances extended valuations
were forced to unwind — pretty spectacularly when the
tech bubble burst in 2000.
A benefit of concentrated markets:
Exposure to winners
The bright side of market concentration is that it gives
equity winners an unimpeded run. A subset of the tech
winners, and a very concrete example of how
concentration differentiates markets, is the S&P’s
exposure to virtual lifestyle stocks. Our recent research on
working from home (WFH) attempts to quantify both the
size of the economic trend and the gearing of financial
markets to it.1 The primary effect of WFH for equities is a
tailwind for companies that provide the hardware and
software tools to enhance home productivity (e.g.,
computer hardware and software, semiconductors and
electronic components, cable and telecommunications,
consumer digital services); ancillary services (e.g., cyber
security, industrial REITS, professional business support)
and other beneficiaries of the spending reallocations that
result (e.g., home improvement, household furnishings
and appliances, electronic entertainment, delivery
services).
1 See: Benjamin Mandel, Mallika Saran and Patrick Lenihan, “The
global ‘work from home’ labor force: Market implications of skill-
biased tech adoption and lower urban density,” Portfolio Insights,
J.P. Morgan Asset Management, June 2020.
The relative losers are predominantly those in sectors
where spending is displaced by the changes in economic
activity (e.g., office and retail REITS, automobiles, energy
and industrial materials, airlines, tourism, hotels). Adding
up the market weights of the industry winners and losers
illustrates the significant concentration of economic
exposures in the S&P 500, and also the large disparities in
those exposures across markets (Exhibit 1).
ASSET CLASS IMPLICATIONS
Ultimately the S&P’s underlying fundamentals make it a
compelling overweight in our global equity allocations,
even at relatively rich valuations. But market
concentration informs our thinking in two important ways.
First, higher volatility affects the sizing of U.S. positions,
which will ratchet down in portfolios with a fixed overall
risk budget. Second, the prospect of tech stocks leading
an equity downturn is a significant impairment in the
index’s defensive nature, amplifying the fact that
monetary policy has quashed Treasury volatility, making
bonds less responsive to swings in equity prices. These
changes in asset class correlations mean that portfolio
hedges are harder to come by. That has led us to seek out
diversification in credit, which benefits from implicit and
explicit guarantees from the Federal Reserve, and in more
balanced equity allocations across the U.S., emerging
markets and Europe. In some cases, too, we simply take
more moderate levels of risk in our multi-asset portfolios.
J.P. MORGAN ASSET MANAGEMENT 3
 PORTFOLIO INSIGHTS

Global Multi-Asset Strategy:

John Bilton Patrik Schöwitz
NEXT STEPS
Head of Global Multi-Asset Strategy Global Strategist, Editor For more information, contact your
London Hong Kong
J.P. Morgan representative.
Michael Hood Thushka Maharaj
Global Strategist Global Strategist
New York London
Benjamin Mandel Sylvia Sheng
Global Strategist Global Strategist
New York Hong Kong
Michael Albrecht Diego Gilsanz
Global Strategist Global Strategist
New York New York
Tim Lintern Michael Akinyele
Global Strategist Global Strategist
London London
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