J.P. Morgan Asset Management released its long-term capital market assumptions for next year, in what they are dubbing “a new portfolio for a new decade.”
In its 25th edition of its research, long-term growth and inflation projections remain the same, but public asset market return expectations fall sharply and force investors to look elsewhere for higher returns.
The firm’s forecast on global growth is 10 basis points, at 2.4%, over the next 10 to 15 years. Meanwhile on the inflation front, officials see no change at 2.2%. Either way investors will need to make some portfolio moves in the coming years.
“As the global economy begins to move towards a new business cycle precipitated by the pandemic in 2020, we anticipate the broad deployment of monetary and fiscal stimulus to have a lasting imprint on economies globally,” said John Bilton, head of global multi-asset strategy, J.P. Morgan Asset Management. “To navigate the new decade, investors may consider diversifying from traditional safe assets that no longer offer income, and toward alternative assets that more fully exploit the specific tradeoffs that a portfolio can tolerate to potentially find higher returns.”
The team at J.P. Morgan said that within alternatives real assets as well as infrastructure and transportation strategies offer returns in line or slightly better than in years past. This is as private equity and hedge funds are predicted to lag their historical returns.
Cap-weighted private equity forecasts show a return decline of 1.1% to 7.7% annualized. This is driven by higher valuations and competition among prospective buyers, combined with a slowdown in fundraising and increased disruption. According to the report, offsetting the returns is a slight upgrade in alpha expectations, based on the ability to deploy dry powder more productively in a dislocated economy and rotation into higher growth sectors.
Returns for real assets have held up, officials said. J.P. Morgan’s forecast is for core real estate to see slight gains with returns in the U.S. and in Asia-Pacific, averaging 5.9% and 6.6%, respectively in 2021. European core real estate (ex-U.K.) is unchanged at 5%.
Global core infrastructure, meanwhile, offers gains of 6.1% in 2021 and global core transportation — a new alts category — is expected to return 7.6%.
Hedge fund strategies, meanwhile, have come down in J.P. Morgan’s forecast in the expectation from lower returns being available in public market assets. Next year hedge fund managers will likely return anywhere from 2.2% to just over 3%.
Officials did point out, however, that hedge funds may provide new sources of diversification, and income-producing core alternatives that can offer a measure of protection.
Notably, J.P. Morgan did say that investors appear to have reached the conclusion that the long-term benefits of non-traditional assets are likely to outweigh the challenges.