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IN BRIEF

  • Our long-term volatility assumptions are largely unchanged from 2017, despite the low level of asset volatility across markets generally.
  • In our view, the low levels of volatility across asset classes are consistent with the late stage of the business cycle and not the result of a structural change or thematic shift. Therefore, we do not adjust our volatility assumptions downward relative to last year’s estimates.
  • Based on our long-term return and volatility assumptions, taken together, Sharpe ratios, in general, are projected to fall marginally for equities and credit while increasing for government bonds. Despite the decline, credit continues to rank well in expected risk-adjusted return terms, closely followed by equities. The risk-adjusted return for government bonds remains considerably below its historical average.
  • This year we introduce two enhancements to our process for estimating volatility, designed to ensure that our assumptions process has the flexibility to incorporate our forward-looking expectations, whether those views are in line with or deviate from historical business cycle length and composition.
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Little change in risk assumptions

Our 2018 Long-Term Capital Market Assumptions volatility projections are generally unchanged from 2017 estimates, despite a currently low asset volatility environment. Clearly, volatility in financial markets has been running at historically low levels, particularly for risk assets and most notably for equities. This low volatility may prompt some to ask if structural changes in asset volatility have taken place. As we will show, we find little evidence to support this conjecture. In our view, currently low asset volatility levels are in line with the late phase of the business cycle we are in—and we see little need to adjust our forward-looking estimates downward.

Asset volatilities are near historical lows, but in line with this late phase of the business cycle

ONE-YEAR ROLLING REALIZED VOLATILITY OF GLOBAL EQUITIES AND FIXED INCOME (%)*
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Source: Bloomberg Barclays, Deutsche Börse AG, FTSE Russell, MSCI, Standard & Poor’s, J.P. Morgan Asset Management; data as of July 31, 2017.
*U.S. large cap equities based on S&P 500 returns; U.S. small cap equities based on Russell 2000 returns; EAFE equities based on MSCI EAFE returns; German equities base on DAX returns; U.S. fixed income based on Bloomberg Barclays U.S. Aggregate returns.

 

View other assumptions

Examine our return projections by major asset class, their building blocks and the thinking behind the numbers.
 
 
ABOUT LONG-TERM CAPITAL MARKET ASSUMPTIONS

Our Long-Term Capital Market Assumptions are part of a deeply researched proprietary process that draws on in-depth quantitative and qualitative inputs from experts across J.P.Morgan Asset Management. We, and many of our clients, rely on the output as a foundation for multi-asset class investing.

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