J.P. Morgan Asset Management publiceert 2020 Long-Term Capital Market Assumptions

November 26, 2019

J.P. Morgan Releases 2020 Long-Term Capital Market Assumptions, Analysis Reveals Need For New Portfolio Construction Tactics in Low-Rate World.

J.P. Morgan Asset Management released its 2020 Long-Term Capital Market Assumptions (LTCMAs), this year exploring the complexities of late-cycle investing in an environment of ultra-low bond yields. The research forecasts modest global growth over the next 10-15 years, as investors must re-think “safe-havens” in their portfolio now that bonds simply can’t offer the same combination of portfolio protection and positive income that they have in the past.

‘Our 2020 assumptions are being released against a backdrop of trade uncertainty between the world’s economic superpowers and a recent reversal in the trajectory of global monetary policy,’ said John Bilton, Head of Global Multi-Asset Strategy, J.P. Morgan Asset Management. ‘In an environment of very low bond yields, investors must reassess how to design the optimal portfolio as the trade-off is no longer between foregone risky asset returns and reduced portfolio risk, but is instead between a zero or even negative return in exchange for that risk reduction.’

‘Over the last year, the economic cycle matured even further, becoming the longest U.S. expansion on record,’ Dr. David Kelly, Chief Global Strategist, J.P. Morgan Asset Management. ‘Our growth projections for the 10-15 year investment horizon remain relatively modest with aging populations a key headwind, while a technology-driven boost to productivity represents the main upside risk. Portfolio flexibility remains key for investors looking to manage cycle uncertainty, with those seeking higher returns continuing to be drawn to private markets and other alternatives as a both a diversifier and source of alpha.’

Key Findings

Global Growth: Real global growth is expected to average 2.3% over the next 10-15 years, down 20 basis points (bps) from our projections last year. The developed market forecast remains unchanged at 1.5% but emerging market (EM) forecasts have been trimmed 35bps to 3.9%. Population aging is broadly to blame for the low forecasts for global growth.

Global Inflation: Projections for global inflation are little changed from last year, with global CPI forecast at 2.2%. In many countries, however, inflation will remain below this figure, particularly those such as Japan and Switzerland who have had many years of extremely low nominal rates. Further, we project that central banks in many countries will fall short of reaching their stated inflation targets over our forecast horizon.

Monetary Policy: Global monetary policy is expected to remain extremely accommodative throughout this cycle and well into the next one, leading to a significant delay in rate normalization being built into forecasts. That, in combination with much lower starting yields and a modest cut to our equilibrium yield estimates, adds up to a sharp fall in projected fixed income returns – in some cases taking them negative over the forecast horizon.

60/40 Portfolio Returns: Expected returns for a 60/40 U.S. stock-bond portfolio fall 10bps to 5.4% and the stock-bond frontier steepens a little. Sharp ratios for bonds fall sharply but still sit slightly ahead of equities in USD, while in other currencies they are now negative in some cases, pointing to a bleak outlook for fixed income returns.

Asset Class Assumptions

Equities: The long-term return outlook for equities is slightly better in 2020 than last year. Average global equity return forecasts over the next 10-15 years rise 50bps to 6.5% in U.S. dollar terms. The forecast for developed markets is up 20bps to 5.7%, and for emerging markets (EM) it is raised 20bps, to 8.7% in local currency terms. In developed markets, the majority of this improvement is the result of better starting valuations, while in EM markets the boost is more evenly split between earnings and valuation.

Fixed Income: Cash return forecasts in most major currencies are lower as normalization assumptions have been extended. This year’s assumptions include an explicit ranking of real cash rates across major markets.

Anticipating continued central bank dovishness, we shift our equilibrium interest rates lower across major G4 markets and extend the time horizon over which we expect rate normalization. In the wider fixed income complex, credit continues to offer a decent return uplift although expected total returns in U.S. investment grade credit have come down 110bps to 3.4% due to a renewed drag from interest rate normalization. For a long-term investor, credit may present an opportunity to enhance portfolio returns.

Alternatives: As public equity returns move a little higher this year, we see a parallel increase in private equity market returns. The 10-15 year aggregate private equity return forecast has been raised 55bps to 8.80%. Private equity continues to be attractive to those investors looking for return uplift, as well as those seeking more specific exposure to technology themes. This year we forecast that core U.S. real estate returns, levered, net of fees, will average 5.80% over the next 10-15 years. Casting the net more widely, forecast returns from global real assets and infrastructure have held up remarkably well, and given the resilience of their cash flows they may even act as a proxy for duration in portfolios with limited short run liquidity demands. Manager selection remains the primary determinant of returns across alternatives.

Currency Exchange Rates: As was the case last year, we expect the U.S. dollar (USD) to depreciate over our forecast horizon vs. other major global currencies. Our LTCMAs forecast a long-term equilibrium fair value for EURUSD of 1.38, for USDJPY of 88, and for GBPUSD of 1.48. The dollar’s overvaluation could compromise some of the currency’s appeal as a potential safe haven asset. We also note that currencies don’t move to equilibrium in a straight line and crosses can remain at a good stretch from theoretical fair value for lengthy periods. Nevertheless, a persistently overvalued USD remains a meaningful consideration when designing an optimal global asset allocation.

In addition to covering key findings, the 2020 research explores four important themes in depth, including:

• The failure of monetary stimulus – The limitations of conventional and unconventional monetary easing.

• The next phase of China’s growth – How China’s financial markets are changing as it becomes a higher-income country.

• New economy, same old returns? – What the adoption of e-commerce technology can mean for economic growth and investment opportunities.

• Rethinking safe haven assets – What can investors do to build more resilient portfolios?

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 24th 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 50 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.