J.P. Morgan Releases 2018 Long-Term Capital Market Assumptions, Analysis Reveals Headwinds and Opportunities for Returns in Today's Late Cycle Economy

NEW YORK, Nov. 7, 2017 /PRNewswire/ -- J.P. Morgan Asset Management released its 2018 Long-Term Capital Market Assumptions (LTCMAs), focused this year on helping investors and advisors navigate the high valuations and above average corporate margins of today's mature economic cycle. The research shows that while cyclical factors continue to constrain traditional 60/40 portfolios, stabilizing secular growth gives investors reason for cautious optimism -- and incentive to turn off auto-pilot -- to seize opportunities across the full spectrum of asset classes and investment strategies.

"Our 2018 assumptions represent something of a watershed moment in our long-term economic outlook. Over the last decade, aging populations drove successive downgrades to our estimates of trend growth, but now this sequence of downgrades may be nearing an end.  For the first time we can see tangible upside risks to long-term trend growth expectations starting to emerge, notably from a technology-driven boost to productivity," said John Bilton, Head of Global Multi-Asset Strategy, J.P. Morgan Asset Management. "To manage headwinds and capture opportunities over the next few years, investors should turn to robust, diversified portfolios with a broad base of asset classes. Alpha can still be found."

"The world economy is enjoying the best period of synchronized growth in over a decade," said Dr. David Kelly, Chief Global Strategist, J.P. Morgan Asset Management. "Against this backdrop, we focus on secular themes along with reflections of their nearer-term cyclical implications that could drive asset returns over the next decade including: the impact of global aging, potential effects of technology, the path of the U.S. dollar and the future liberalization of the Chinese economy." 

The outlook of this year's LTCMAs: "Secular optimism, cyclical realism," concluded Bilton.

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 22^nd 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.

KEY FINDINGS

• This year, expected return for a U.S. dollar-based 60/40 portfolio is slightly lower at 5.25%, down from 5.50% last year. 

• The LTCMA 2018 trend GDP growth estimates of 1.5% in developed markets and 4.5% in emerging markets (annualized over the next 10 to 15 years) are unchanged from last year.

• The cyclical positioning of the business cycle translates into rather modest equilibrium return expectations for most asset classes. Alpha opportunities are widely spread across asset classes.

• Real growth will run at a modest pace by long-term historical standards, with aging populations representing the most important source of slowing relative to the past.

• Technology will affect economic growth rates and capital market returns in ways that are difficult to foresee. Some upside risks to long-term growth are emerging as technology has scope to lift productivity.

• While the euro has moved off its cyclical lows, it remains well below fair value. The 2018 LTCMAs upgrade trend growth estimates for a major economic bloc (Eurozone) for the first time in a decade.

• As a group, emerging market (EM) economies will grow faster than their developed market (DM) counterparts. India will lead the way in emerging market growth as China gradually slows.

ASSET CLASS ASSUMPTIONS

Equities: our equity assumptions call for lower expected returns in developed markets (DM) and emerging markets (EM). The gap between EM and DM equity returns has narrowed marginally from our last LTCMA edition. We see returns over our time horizon falling modestly but steadily behind what historical experience would suggest.

Fixed Income: credit remains the bright spot in fixed income and an attractive source of income for yield starved investors. Although the current credit cycle is rather mature, our long-term projections of both defaults and recovery suggest current spread levels remain attractive for very long-term investors. The EM debt outlook continues to improve, implying that it offers an attractive diversifier to credit portfolios even with current spreads quite close to long-term fair value.

Alternatives: we see an improving outlook for alternative strategies relative to public markets, largely due to industry and investment trends expected to favor alpha generation and help offset some of the drag from reduced public market expectations. As always, manager selection will be a critical determinant of investment success across all alternative strategy classes.

Foreign Exchange: despite the sharp decline in the U.S. dollar in 2017, the currency remains meaningfully above our long-term estimates of fair value. We would expect the pace of further declines to moderate somewhat. The impact of currency translation on asset returns will continue to be an important consideration for many investors.

Please view the full 2018 Long-Term Capital Market Assumptions here.  

About J.P. Morgan Asset Management
J.P. Morgan Asset Management, with assets under management of $1.6 trillion (as of September 30, 2017), 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 $2.6 trillion (as of September 30, 2017) and operations worldwide. Information about JPMorgan Chase & Co. is available at www.jpmorganchase.com.

The resulting projections derived from the J.P. Morgan Asset Management ("JPMAM") Long Term Capital Market Assumptions include only the benchmark return associated with the portfolio and does not include alpha from the underlying product strategies within each asset class. The assumptions are presented for illustrative purposes only. They must not be used, or relied upon, to make investment decisions.  The assumptions are not meant to be a representation of, nor should they be interpreted as JPMAM investment recommendations. Allocations, assumptions, and expected returns are not meant to represent JPMAM performance. Please note all information shown is based on assumptions, therefore, exclusive reliance on these assumptions is incomplete and not advised.  The individual asset class assumptions are not a promise of future performance.  Note that these asset class assumptions are passive-only; they do not consider the impact of active management.  

Opinions and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. References to specific securities, asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations. The information in this piece is not intended to provide and should not be relied on for accounting, legal, and tax advice or investment recommendations.

J.P. Morgan Asset Management is the brand for the investment management business of JPMorgan Chase & Co. and its affiliates worldwide.

SOURCE J.P. Morgan Asset Management