The market drawdown in 2022 is creating an increasingly attractive entry point for long-term investors.
Back to Basics
Lower valuations and higher yields mean that asset markets today offer the best long-term returns in more than a decade. It took a painful slump in stock and bond markets to get here, and the worst may not yet be over.
But after a year of turmoil, the core principles of investing still hold firm. Once again, 60/40 can form the bedrock of portfolios, while alternatives can offer alpha, inflation protection and diversification. Meanwhile, the end of free money, greater two-way risk in inflation and policy, and increased return dispersion across assets also give active managers more to swing for.
In the near term, investors face a challenging time as a recession, or at least several quarters of subtrend growth, lie immediately ahead. Still, our assessment of long-term trend growth is only marginally below last year’s. We expect today’s inflationary surge to eventually subside to a rate only slightly above our previous estimates.
Bonds normalize, stock forecasts soar
Our forecast annual return for a USD 60/40 stock-bond portfolio over the next 10–15 years leaps from 4.30% last year to 7.20%.
After policy rates normalized swiftly, bonds no longer look like serial losers. Once again, they offer a plausible source of income as well as diversification. Higher riskless rates also translate to improved credit return forecasts.
Projected equity returns rise sharply. In local currency terms, our developed market equity forecast rises 340 basis points (bps), to 7.80% , and in emerging markets jumps 230 bps, to 8.90%. Corporate profit margins will likely recede from today’s levels, but not revert completely to their long-term average.
Stock and bond valuations present an attractive entry point. Alternatives still offer benefits (diversification, risk reduction) not easily found elsewhere. With the U.S. dollar more overvalued than at any time since the 1980s, the FX translation will be a significant component of forecast returns.
Scarce capital, surging demand for capex
Many long-term themes affecting our outlook (demographics, shifts in globalization patterns) will demand higher capital investment – paradoxically just as the abundance of cheap capital of the last decade is reversing. As financial markets look to efficiently allocate scarce capital, the result may be more idiosyncratic returns, and lower correlations within indices.
Overall, the return outlook in this year’s Long-Term Capital Market Assumptions stands in stark contrast to last year’s. Headwinds from low yields and high valuations have dissipated or even reversed, and asset return forecasts might be considered “back at par.”
Asset reset, attractive entry point
It has taken a meaningful reset in asset markets to bring us to this place, and considerable pain for bondholders over a much shorter horizon than we had expected. Still, the underlying patterns of economic growth look stable, and the assumptions that underpin asset returns – cycle-neutral real cash rates, curve shape, default and recovery rates, and margin expectations – are little altered.
But the market drawdown in 2022 is now creating an increasingly attractive entry point for long-term investors. While 2022 was a painful ride as long-standing dislocations closed sharply, investors can now look forward to compounding future returns at much more attractive levels.
After a year of turmoil, the core principles of investing still hold firm. Once again, 60/40 can form the bedrock of portfolios, while alternatives can offer alpha, inflation protection and diversification.
Our expectations for returns, volatilities and correlations. Use our interactive version to download the excel in your chosen currency.
The assumptions are not designed to inform short term tactical allocation decisions. Our assumptions process is carefully calibrated and constructed to aid investors with strategic asset allocation or policy-level decisions over a 10- to 15-year investment horizon.
Our assumptions can be used to:
Develop or review a strategic asset allocation
Understand the risk and return trade-offs across and within asset classes and regions
Assess the risk characteristics of a strategic asset allocation
Review relative value allocation decisions
Download matrix by currency
These articles look into issues likely to have a profound and protracted impact on the global investment landscape.
Deglobalization is not inevitable. We expect a multi-polar world in which trading blocs become more politically aligned.
As globalization evolves, trade intensity in goods will likely decline. But services could flourish in a global economy that is more virtual.
In any disruptive environment, there will be winners and losers – new opportunities and risks – as investors adapt and respond to change.
Is globalization – an era of increasingly close economic integration- about to go into reverse? We don’t think so.
Globalization will not unravel but it will evolve, in our view. We see a wide spectrum of possible outcomes. The most likely scenario is a multi-polar world in which trading blocs become more politically aligned. Overall, the global economy could become less efficient.
Precisely how globalization evolves will likely depend on the role of innovation and automation, demand growth in new markets, as well as rising (or declining) nationalism and shifts in regulation on climate, taxes, and data.
There will be winners and losers by geography and industry. For example:
Low wage economies that have derived the greatest benefit of decades of globalization appear at greatest risk. Those yet to partake in export-led growth may see development curtailed.
Greater regionalization as supply chains diversify and production moves closer to demand would benefit Asia and an increasingly wealthy consumer base.
Services sector takes the lead
As globalization evolves, trade intensity in goods will likely decline. But services could flourish in a global economy that is more virtual. Services industries should benefit from investment in skilled labor and labor-saving technologies. Economies such as India and the Philippines, with large populations of English speakers and established infrastructure, may also benefit and attract more foreign capital.
While regulations may tighten on the technology sector broadly, certain technology companies will benefit from new demands. The rise of “digital sovereignty” as a national security issue likely means increased spending on cybersecurity. Even before the Russian invasion of Ukraine, it was estimated that cybersecurity spending would surpass USD 200 billion by 2024, up 43% from 2021.
As the threat and costliness of security breaches worsen, companies and governments are highly incentivized to invest in protection. Similarly, defense sectors could benefit from a more tense and fragmented world.
Meanwhile, robotics and automation should become increasingly important and cheaper as replacements for workers, and as access to low-wage labor becomes more limited. We anticipate this trend continuing as aging demographics in developed countries further strains the labor supply and production shifts location to serve growth in new markets.
China’s shifting roles and relationships
What role will China play in the evolution of globalization?
China seems increasingly at risk of reduced trade with the rest of the world following a series of U.S. and European government actions aimed at regulating and curbing reliance on China. In such a scenario, other economies may see benefits. The rise in Chinese wages has already helped the wider Asian region as production has moved to relatively lower cost markets close to the source of final demand.
The shift to greater supply chain diversification could accelerate this trend, especially for manufacturers of consumer products such as textiles and technology hardware. It could also support infrastructure investment.
Investors adapt to change
The global economy has clearly benefited from 70 years of rising globalization. We expect a reconfiguration ahead, rather than a reversal. It will be a disruptive environment in many ways, with new opportunities and risks as investors adapt and respond to change.
Global population growth creates dramatic challenges and opportunities. Key for investors: demographics’ impact on economic growth, consumption patterns, infrastructure needs and the use of finite resources.
Countries are not guaranteed a demographic dividend. Policy, we believe, will be a differentiator. We created a set of scores to help screen for economies with solid national and corporate policies.
Timely investment is needed to cope with the stress growing populations put on the planet. Investment opportunities exist in green infrastructure, agriculture technologies, alternative sources of protein and reforestation.
By the end of this century, the global population is set to reach 10.6 billion, creating dramatic challenges and opportunities. “Younger” economies with a rising proportion of working-age people (15–64) stand to gain a demographic dividend – faster economic growth – than economies with a large proportion of older adults. In sub-Saharan Africa, the Middle East and parts of Asia, the working-age populations are growing the fastest.
Of primary importance for investors are these demographics’ impact on economic growth, consumption patterns, infrastructure needs and the harvest and use of finite resources.
Economic success based on demographics alone is far from guaranteed. Which young economies seem prepared to harness a demographic dividend?
We believe sound policy will be the differentiator. Countries with strong national and corporate governance frameworks, sustainable infrastructure and integration into global supply chains will be the likely winners.
Absent these, important risks arise. Economies that fail to properly invest in their fast-growing working-age labor forces, build out sufficient infrastructure (in time) and ensure the sustainable use of their natural resources could face disastrous consequences.
We have created sets of scores that aggregate indicators of key policy. Together, our four scores offer a multifaceted approach that can help investors decide where they might best take advantage of population growth.
To be sure, income inequality is a challenge. Still, investment opportunities to serve young consumers should be abundant in high-scoring younger economies. Rising numbers of young households in these economies are set to boost consumption growth for clothing, educational services and transportation.
But population growth also means more intensive use of energy, water, food, ecosystems and infrastructure. To alleviate the inevitable stress on the planet, adequate and timely investment is needed in sustainable solutions. Exciting investment opportunities can be found in solutions to the challenges – in rethinking infrastructure, energy and food consumption habits; in more sustainable land use, agriculture and forestry. The themes include green infrastructure, sustainable agriculture technologies, alternative sources of protein and reforestation.
Top-Down score: Measures key sovereign policies and institutions (rule of law, economic freedom, education and others). High scores may indicate appealing government bonds and currencies. India, Vietnam, Malaysia, South Africa, Saudi Arabia and the United Arab Emirates (UAE) show promise.
Bottom-Up score: Captures corporate governance. High scores may indicate appealing equity and credit investments. Malaysia and South Africa score well here.
Migration-Productivity score: Reflects how well an economy is capitalizing on migration trends. High-scoring Canada, UK, U.S., Germany and France can potentially deliver better growth results than their demographics alone suggest.
Energy Transition Momentum score: Captures the potential trajectory of green energy in different economies. Kenya, Vietnam and the UAE stand out.
Ultimately, private capital should complement public initiatives to unlock younger economies’ potential demographic dividend in the most sustainable way.. In a world of higher rates, sound policy will be the key to attract scarcer funding, creating winners and losers for investors along the way.
JPMAM 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 are 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. The views contained herein are not to be taken as advice or a recommendation to buy or sell any investment in any jurisdiction, nor is it a commitment from J.P. Morgan Asset Management or any of its subsidiaries to participate in any of the transactions mentioned herein. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit and accounting implications and determine, together with their own professional advisers, if any investment mentioned herein is believed to be suitable to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yield are not a reliable indicator of current and future results.
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