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J.P.Morgan 2021 LTCMA

Where to find performance in the new economic cycle

J.P.Morgan AM has published the Long Term Capital Martket Assumption: diversification into alternative assets and emerging markets to find returns.

While Europe and the United States are at the peak of the second wave of coronavirus infection, the economy is beginning a new economic cycle whose seeds are being sown by central banks and governments with expansive monetary and fiscal policies. The effect of what is happening in these months will be seen in the coming years and J.P. Morgan AM tried to outline it in the 25th edition of Long-Term Capital Market Assumptions (Ltcma), the analysis of forecasts over a time horizon of 10-15 years.

“As the global economy begins to move into a new economic cycle as the pandemic of 2020 drives the global economy, we expect the broad deployment of monetary and fiscal stimulus to have a lasting impact on global economies”, commented John Bilton, head of Global Multi-Asset Strategy at J.P. Morgan AM.

The only choice, low interest rates

According to J.P. Morgan AM’s analysis, central banks have no choice but to focus less on keeping inflation under control and more on stimulating and maintaining financial stability. This is a significant change and central banks’ incentives could be increasingly favourable to debt issuers rather than to debt holders.

“To navigate the new decade,” Bilton continued, “investors may consider diversifying traditional assets, which no longer offer income, with alternative assets that take full advantage of the trade-offs a portfolio can tolerate to find higher potential returns.

According to J.P.Morgan AM’s analysis of individual asset classes, fixed income will remain extremely low yields, particularly on government bonds, over the next 10-15 years and interest rates will have to wait “at least until 2024”. A movement that, when it comes, could be “rapid”, analysts at the asset management company warn.

Less performing stocks

Equity, while offering more attractive returns, will be affected by high valuations, particularly for US companies and large capitalisations. The return forecast for equities at a global level, extended over the analysis time horizon (10-15 years), thus falls by 1.2% to 4.8%. Excluding the US, the decline is less marked and amounts to 0.7% to 5.8%, which implies better forecasts for ex-USA markets, particularly emerging markets.

Thushka Maharaj, J.P.Morgan AM’s global multiasset strategist, commented on the issue:

“Our emerging market growth prospects continue to outpace developed markets as emerging market productivity and human capital gradually converge towards developed country levels.

Diversification in alternative assets

In the face of a reduction in return opportunities on traditional asset classes, better opportunities can be found among the alternatives as J.P. Morgan AM’s analysts wrote:

“In real assets, returns have held up very well. Our forecasts for core real estate rose 0.1% in the US and Asia-Pacific region to 5.9% and 6.6%, respectively, while for Europe, excluding the UK, they remained unchanged at 5.0%. Infrastructure and transport offer high returns to investors, with equity returns on core global infrastructure up 0.1% to 6.1 and global core transport – a new asset type added this year – up 7.6%. Capitalisation-weighted private equity projections fell 1.1% to 7.7%, due to higher valuations and competition among potential buyers, combined with a slowdown in asset inflows and greater structural change.”

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