NEW YORK, Jan. 16, 2019 /PRNewswire/ -- J.P. Morgan Asset Management released its inaugural Global Alternatives Outlook featuring a 12- to 18-month outlook for each of the key alternative asset classes and highlighting the firm's CEOs, CIOs, portfolio managers and strategists' most promising investment ideas over that time horizon. The report aims to provide investment direction in a year of transition and change as markets adjust to global quantitative tightening, credit markets awash in money with loose covenants, newly volatile equity markets, the threat of trade wars and tariff uncertainty, and a long-in-the-tooth economic expansion.
"As market risks continue to build in 2019, our Alternatives Outlook examines how, when and why investors might want to consider using offensive and defensive approaches across a wide range of alternative asset classes and investment strategies," said Anton Pil, Managing Partner, J.P. Morgan Global Alternatives. "In the current environment, investors can look to increase returns and reduce risk by focusing on assets that generate stable streams of income, and on strategies that benefit from the rising volatility."
"The need for accurate alternatives investment direction, guidance and perspective may never be greater," said Christopher Hayward, Managing Partner, J.P. Morgan Global Alternatives. "In the late-cycle, investors are increasingly looking beyond traditional asset classes to achieve their objectives, recognizing that a sizable allocation to alternatives can be additive to their portfolios."
The report also outlines an approach to alternative asset portfolio construction that comprises three components: a core foundation, with assets such as core real assets and core private credit designed to provide stable income with lower volatility; core complements, with assets such as hedge funds adding diversification through differentiated returns; and return enhancers, with assets such as distressed credit and private equity seeking opportunistic returns.
The outlook reveals the following key asset class findings:
Volatility driving new opportunities - After the lowest equity market volatility in 100 years, financial markets are undergoing a regime change to a new, higher volatility norm, helping generate trading opportunities for certain hedge fund strategies as the relationship among stocks, rates and credit spreads evolves, affecting prices and correlations.
Value stocks set to rebound - Value stocks have significantly underperformed since early 2017. Should borrowing costs rise, or earnings expectations for growth stocks fall, value stocks can be expected to rebound, benefitting hedge fund strategies offering exposure to the equity value factor.
Relative value strategies could shine - Cross-asset RV strategies can continue to benefit from an equity volatility pickup and widening credit spreads. So can market-neutral strategies that do not time the market trade to the relationship between securities and asset classes.
Infrastructure and Transport
ESG critical to infrastructure returns - The integration of ESG standards is the number one trend in private infrastructure—critical to effective due diligence, underwriting and ongoing asset management, and a fundamental influence on investment outcomes.
Key opportunities exist in core-plus transport – Trade tensions and new regulations are driving a focus on core-plus opportunities, where risk is mitigated by direct involvement of operations, and income generation is relatively protected by long-term leases and the strength of lessees' balance sheets.
Increased competition driving focus on quality - Increasingly, private debt fund managers have stepped into the private credit void left by banks and insurance companies following the GFC. Against this backdrop, success will require well-resourced, specialist managers with unique sourcing capabilities, prudent underwriting and disciplined structuring skills.
Pockets of opportunity exist - Parts of the corporate credit market appear stretched and this requires a cautious approach. Still, not all areas of private debt are overheating - attractive loan origination opportunities still exist, with examples including real estate mezzanine debt, U.S. residential mortgages and corporate loans.
Distressed and special situations opportunities to grow - Opportunities in distressed and special situations private credit strategies are particularly well-positioned to take advantage of current late cycle excesses when the next economic downturn occurs. Focus on U.S. and European countries where deep market familiarity is required, where relationships matter and where significant barriers to entry exist.
Investing has become more challenging - Investors have three choices: lower return expectations; sacrifice underwriting standards; or be disciplined in seeking out solid opportunities in this late-cycle with the potential to deliver on private equity risk and return objectives over the long-term. Even in the current market environment of rising valuations and intense competition, there are ample opportunities in PE markets to help investors achieve required, risk-appropriate returns.
Three key areas of focus – Small to mid-size companies; Europe, China and, selectively, India; and businesses benefiting from technological disruption are three areas in private equity where investors can find opportunities.
Global Real Estate
Finding value requires looking beyond the averages - Regional markets are at varied stages of the economic cycle and monetary policy normalization. These differences, and a host of distinct dynamics across and within regions, styles and sectors, create pockets of opportunity that can help investors diversify and enhance real estate portfolio income and return. Four areas viewed as among the most promising over the next 12 to 18 months include:
- US: Don't underestimate core
- Europe: Buy value-assets and sell into core
- Asia Pacific: Take advantage of a diversified market in mid-cycle
- REITs: Use REIT debt to address volatility
To view the full 2019 Alternatives Outlook click here.
About J.P. Morgan Global Alternatives
J.P. Morgan Global Alternatives is the alternative investment arm of J.P. Morgan Asset Management. With more than $135 billion in assets under management and over 800 professionals (as of September 30, 2018), we offer strategies across the alternative investment spectrum including real estate, private equity and credit, infrastructure, transportation, liquid alternatives, and hedge funds. Operating from 23 offices throughout the Americas, Europe and Asia Pacific, our independent alternative investment engines combine specialist knowledge and singular focus with the global reach, vast resources and powerful infrastructure of J.P. Morgan to help meet each client's specific objectives. For more information: www.jpmorganassetmanagement.com.
About J.P. Morgan Asset Management
J.P. Morgan Asset Management, with assets under management of $1.7 trillion (as of December 31, 2018), 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. J.P. Morgan Asset Management is the marketing name for the asset management businesses of JPMorgan Chase & Co. (NYSE: JPM), and its affiliates worldwide.
Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. The views and strategies described may not be suitable for all investors. References to specific asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations.
SOURCE J.P. Morgan Asset Management