NEW YORK, Nov. 8, 2021 /PRNewswire/ -- J.P. Morgan
Asset Management today released its 2022 Long-Term
Capital Market Assumptions (LTCMAs), providing a 10-15-year
outlook for risks and returns as the economic scars of the pandemic
quickly fade, but policy impacts persist.
In the 26th edition of the research, expected returns
remain low by historical standards, with a 60/40 portfolio
projected to return just 4.3 percent, suggesting that investors
need to look beyond traditional asset markets to find higher
returns. Additionally, this year's research argues that while real
bond yields will continue to lag, mispriced liquidity risk could
make real assets serial winners.
This year's research also features several thematic articles
tackling issues top of mind for investors:
- Doing good and doing well: ESG trade-offs in
investing
- Chinese assets: The biggest risk for investors would be to
ignore them
- Cryptocurrencies: Bubble, boom or blockchain
revolution?
- Alternative investments: The essential buyer's
guide
- Weighing the impact of tax loss harvesting on long-term
savings goals
"We are increasingly convinced that the pandemic will leave
behind few economic scars, however we expect the policy
interventions at the height of the crisis will have a long-lasting
impact on markets," said John
Bilton, Head of Global Multi-Asset Strategy, J.P. Morgan
Asset Management. "Our overall message is optimistic, and those
investors who are willing to expand opportunity sets and embrace
sources of risk premia beyond traditional assets can still find
ample sources of alpha to generate robust and efficient portfolio
returns, even as public market return expectations remain
muted."
"For the first time in many years we have raised our long-term
inflation projections across economies, driven by a somewhat
different dynamic to that seen after the global financial crisis,
as economies have quickly closed output gaps and fiscal and
monetary policy work in partnership," said Dr. David
Kelly, Chief Global Strategist, J.P. Morgan Asset Management. "We
expect modest real GDP growth by historical standards, with the
heavyweight economies of U.S., China and India dragging on the outlook. While we
anticipate productivity to grow, spurred on by the pandemic shock
encouraging business adoption of technologies, the reality of weak
demographics will continue to weigh on economic growth across both
developed and emerging economies."
KEY FINDINGS
Global Growth: We thus expect 2.2% real GDP growth for
our set of economies over the next 10 to 15 years, vs. 2.9% from
2010 to 2020 and 2.7% from 2000 to 2020. We believe aggregate
developed market (DM) growth, which we forecast at 1.5%, will run
fairly close to its historical track record. But China's ongoing deceleration pulls down the
emerging market (EM) aggregate: We assume 3.7%, compared with 6.0%
during the 20 years ended in 2020.
Global Inflation: For the first time in many years,
we have raised our long-term inflation projections to 2.4% (up from
2.2%), and now see less risk of persistent deflationary pressures.
We detect a different inflationary dynamic: Post-recession, output
gaps are closing quickly; meanwhile, stimulative fiscal and
monetary policies are working in partnership. The inflation
manifesting itself in the late stages of the COVID-19 pandemic is
proving a little stickier than the central banks expected.
Policy: The effect of pandemic policy choices will
linger, and we must acknowledge that the very same bold fiscal and
monetary policy that propelled us out of the pandemic gloom
represents a seismic and lasting evolution of economic policy. Gone
is a decade of sluggish capex, periodic austerity and weak
productivity, offset by loose monetary policy. In its place, we
find an emphasis on nominal growth and a greater willingness to
tolerate larger balance sheets and higher national debt than we've
seen since 1945. Emboldened by their pandemic policy success,
governments are now focused on medium-term ambitions. Multi-year
spending plans have already been laid out with an emphasis on
rebuilding crumbling infrastructure, addressing social inequality
and tackling climate change.
ASSET CLASS ASSUMPTIONS
Equities: We forecast an unchanged 4.10% annual
return for U.S. large cap equities over our investment horizon,
while the favorable margin and valuation impact improves our
eurozone equity forecast 60bps, to 5.80%. We make a small cut
of 10bps in Japan, to 5.00%, and a
large downward adjustment of 260bps, to 4.10%, for UK stocks, where
today's sector mix points to substantial margin headwinds and
likely multiple contraction. Emerging markets (EM) see a more
modest 20bps dip, to 6.60%. These changes combine to pull our
estimate of global equity returns down 10bps, to 5.00% in USD
terms.
Fixed Income: While the outlook for government bonds
remains dire, our forecasts for nominal bond returns improve from
2021. Higher starting yields and simply moving forward one year –
such that our calculations drop one year of zero or negative policy
rates and include a year of at least modestly higher rates at the
end of the forecast horizon – improve bond returns. Together, these
factors push our 10-year U.S. Treasury returns forecast 80bps
higher to 2.40%, while USD cash returns forecasts are up by 20bps
to 1.30%. Nevertheless, given our U.S. inflation estimate of 2.30%,
this still implies negative real returns for cash and virtually
zero real return for Treasuries, on average, across our forecast
horizon. Outside the U.S., the picture looks bleak, with nominal
government bond returns of just 1.25% for 10-year EUR and 1.70% for
10-year GBP, which imply significantly negative real returns.
Alternatives: Financial alternatives offer a marked
uplift compared with public markets, with cap-weighted private
equity up 30bps from last year, at 8.10%, and private
debt offering 6.90%. The private debt expected return is a
10bps increase over 2021, and a much more favorable uplift when
compared with public credit returns. While financial alternatives
generally do have an equity beta, the additional returns available
from manager selection can deliver a meaningful boost to
portfolios. Real assets continue to stand out as an
opportunity set that is both attractively valued – not having
participated fully in the post-pandemic risk rally – and also
likely to be resilient in multiple future states. In the near term,
strong income streams in real estate, infrastructure and
transportation assets are welcome when bond yields are
compromised.
The LTCMAs are developed as part of a deep, proprietary research
process that draws on quantitative and qualitative inputs as well
as insights from a team of more than 30 experts across J.P. Morgan
Asset Management. In its 26th year, these
time-tested projections help build stronger portfolios, guide
strategic asset allocations, and establish reasonable expectations
for risk and returns over a 10 to 15-year timeframe for more than
200 major asset and strategy classes. These assumptions fuel
decision-making in J.P. Morgan's multi-asset investing engine and
inform client conversations throughout the year.
Please view the full 2022 Long-Term Capital Market Assumptions
and thematic articles here.
About J.P. Morgan Asset Management
J.P. Morgan Asset Management, with assets under management of
USD 2.7 trillion (as of 30 September 2021), is a global leader in
investment management. J.P. Morgan Asset Management's clients
include institutions, retail investors and high net worth
individuals in every major market throughout the world. J.P. Morgan
Asset Management offers global investment management in equities,
fixed income, real estate, hedge funds, private equity and
liquidity. For more information:
www.jpmorganassetmanagement.com.
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SOURCE J.P. Morgan Asset Management