"Based on our research, in today's challenging environment expected returns for a simple balanced 60/40 stock-bond portfolio are down by 75 bps and reinforce our view that static balanced allocation has run out of road," said John Bilton, Global Head of Multi-Asset Strategy, J.P. Morgan Asset Management. "Income seekers may be forced further into credit or equity, and investors looking to boost returns may have to increasingly consider alternative assets, new avenues of diversification and, above all, an active approach to asset allocation."
In addition to making a strong case for diversification, the 2017 LTCMAs consider larger economic trends and the far reaching effects of what an extended period of policy normalization could mean for investors moving forward.
"Loose monetary policy borrowed returns from the future and economic growth remains under pressure in both developed and emerging markets," said Dr. David Kelly, Chief Global Strategist, J.P. Morgan Asset Management. "As economic growth forecasts continue to shrink, the return outlook for most assets is tough making active management a critical, key source of return."
The return assumptions incorporate more than 50 asset and strategy classes, and are available in 10 base currencies. Key findings from the 21st annual edition of the LTCMAs include:
- Developed market real economic growth may average just 1.5%, haunted by poor demographics and weak productivity; emerging market growth set to average 4.5%, constrained by high leverage and poor productivity growth.
- The legacy of central bank policies, which borrowed asset returns from the future, will cast a long shadow on expected returns and cause interest rates to stay lower than their historical average – that means negative real returns on cash as well as the erosion of duration premium on bonds to near zero.
- Credit markets are bright spots in the fixed income universe and returns should be attractive for high yield and longer-dated investment grade corporate credit. Emerging market debt also offers some return potential in what are otherwise lean times for bond investors.
- Equities will be a less rewarding but still an important source of returns. Lower economic growth and higher starting valuations will drag down expected returns. Emerging markets will offer relatively higher returns driven by earnings growth but developed market returns will be principally from increased payouts to shareholders.
- The U.S. dollar is overvalued against many currencies, but will depreciate only gradually, as policy differentials between gradual US normalization and unremittingly easy policy in Europe and Japan will linger for years. Meanwhile, the broad based underperformance of emerging market currencies is coming to an end.
- Real assets will hold up best in a world of challenged growth and lackluster returns. As alternative investments become more mainstream across the board, selection of the best performing managers will remain a key determinant of returns.
Please view the full 2017 Long-Term Capital Market Assumptions here.
About J.P. Morgan Asset Management
J.P. Morgan Asset Management, with assets under management of $1.8 trillion, 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. JPMorgan Chase & Co. (NYSE: JPM), the parent company of J.P. Morgan Asset Management, is a leading global asset management firm with assets of approximately $2.5 trillion and operations worldwide. Information about JPMorgan Chase & Co. is available at www.jpmorganchase.com.
About J.P. Morgan Asset Management Long-Term Capital Market Assumptions
Given the complex risk-reward trade-offs involved, we advise clients to rely on judgment as well as quantitative optimization approaches in setting strategic allocations. Please note that all information shown is based on qualitative analysis. Exclusive reliance on the above is not advised. This information is not intended as a recommendation to invest in any particular asset class or strategy or as a promise of future performance. Note that these asset class and strategy assumptions are passive only–they do not consider the impact of active management. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Assumptions, opinions and estimates are provided for illustrative purposes only. They should not be relied upon as recommendations to buy or sell securities. Forecasts of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material has been prepared for information purposes only and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. The outputs of the assumptions are provided for illustration/discussion purposes only and are subject to significant limitations. "Expected" or "Alpha" return estimates are subject to uncertainty and error. For example changes in the historical data from which it is estimated will result in different implications for asset class returns. Expected returns for each asset class conditional on an economic scenario; actual returns in the event the scenario comes to pass could be higher or lower, as they have been in the past, so an investor should not expect to achieve returns similar to the outputs shown herein. References to future returns for either asset allocation strategies or asset classes are not promises of actual returns a client portfolio may achieve. Because of the inherent limitations of all models, potential investors should not rely exclusively on the model when making a decision. The model cannot account for the impact that economic, market, and other factors may have on the implementation and ongoing management of an actual investment portfolio. Unlike actual portfolio outcomes, the model outcomes do not reflect actual trading, liquidity constraints, fees, expenses, taxes and other factors that could impact the future returns. The model assumptions are passive only—they do not consider the impact of active management. A manager's ability to achieve similar outcomes is subject to risk factors over which the manager may have no or limited control.
J.P. Morgan Asset Management is the marketing name for the asset management businesses of JPMorgan Chase & Co. and its affiliates worldwide.
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SOURCE J.P. Morgan Asset Management