J.P. Morgan Releases 2021 Alternatives Outlook as Investors Increasingly Turn to Alternatives in Search of Alpha, Income and Diversification
Report Highlights Opportunities Across Hedge Funds, Private Equity, Private Credit, Real Estate, Infrastructure, other Real Assets and Liquid Alternatives
New York, NY, January 19, 2021 : J.P. Morgan Asset Management today released its third annual Global Alternatives Outlook, providing a 12-to-18 month outlook across key alternative asset classes and highlighting the views of the CEOs, CIOs and strategists from the firm's 14 distinct alternatives investment engines.
The report assesses the impact of a COVID-19 impacted year on the investment landscape, and assesses opportunities across alternatives in 2021 as investors continue to shift their focus from public to private markets in the search for alpha, yield and diversification.
“After the unprecedented events of 2020 and the ensuing economic recovery, jump-started by swift central bank action and fiscal stimulus, investors continue to hunt for yield to take advantage of underlying consumer strength and resilient fundamentals across global economies,” said Anton Pil, Head of Alternatives, J.P. Morgan Asset Management. “In this environment, alternatives, perhaps once considered optional in investors’ portfolios, have become essential.”
“Our 2021 Global Alternatives Outlook leverages our more than 50-year track record in alternatives to deliver nuanced investment guidance for investors faced with stretched valuations in traditional markets, limited correlation benefits between fixed income and equities, and persistently low bond yields with asymmetric risk.”
The 2021 Global Alternatives Outlook also provides an alternatives framework for investors to build resilient portfolios by categorizing asset classes according to their role in the portfolio, divided into core foundation, core complements and potential return enhancers.
Some of the key themes revealed across asset classes in the 2021 Global Alternatives Outlook include:
Strong opportunities for growth in 2021 - A rich environment for growth is anticipated in 2021, even with most pandemic-related dislocation behind us and generally elevated valuations. The macro backdrop is broadly supportive, with continuing fiscal stimulus, liquidity from central banks, probable above-trend growth and, most of all, economies rebounding.
Global megatrends to take center stage - We’ll be investing in global megatrends—sustainability, emerging market consumers, tech (including healthcare tech, such as telemedicine). We believe consumer and corporate technology adoption is at an inflection point, creating opportunities in cloud computing, software, cybersecurity, payments, semiconductors and biotech.
Interesting opportunities to emerge from SPACs - We expect interesting opportunities to arise from the improved quality and credibility of SPAC sponsors, acquisition targets and underwriters, SPACs’ inefficiencies, and retail investors’ interest. Among the strategies, each with different risk/return characteristics, we are investing in SPACs for yield and investing in anticipation of an announced acquisition.
Acceleration of sustainable investing following COVID-19 - We see the focus broadening based on the environmental, governance and social issues accelerated by the flagrant disparities in COVID-19’s impact on society—in health, income and education access for people of color—and the revitalized civil rights movement. Like any megatrend, there will winners and losers – and opportunity for alpha.
Control and stakeholder engagement remain paramount - 2020 proved that owning a controlling stake in a business often provides the tools required to manage a crisis, where control positions allowed investors to work hand in hand with their companies and management to quickly resolve any issues they were facing during the pandemic. Stakeholder engagement also came to the fore, when in the early weeks of the pandemic shutdowns, regulated utilities agreed not to disconnect any customers for nonpayment - both the right thing to do and exactly what regulators were looking for.
Accelerated focus on energy transition - The COVID-19 crisis accelerated focus on the transition to a low carbon economy and the build-out of solar and wind energy capacity will continue to accelerate. Utilities will further shift from more traditional fossil fuels to renewables, often complemented by less carbon intensive and non-intermittent natural gas generation. Facilitating this transition and its acceleration will continue to provide investment opportunities.
Infrastructure to remain a valuable diversifier and source of yield, income in 2021 - By their nature, investments in private core infrastructure are expected to be relatively cycle-agnostic, given they represent essential services. As investors have a tough time finding income, we expect the relatively attractive yield associated with infrastructure will stand out. Indeed, more and more yield-centric investors are allocating to private infrastructure. Like real estate 20 or 30 years ago, private core infrastructure is fast becoming a standard part of institutional asset allocation.
Critical need for capital across sector - Access to capital is critical for participation in this capital-intensive sector, and this has grown even more critical now given the pressing need for investment in environmentally sustainable technology. The link between capital strength and environmental sustainability will be self-reinforcing as financing and leasing opportunities in the industry become linked to environmental, social and governance (ESG) performance, with one overarching goal: to improve engine technology and reduce emissions.
Search for scalable and sustainable technology solutions - Engines powered by hydrogen or ammonia could be an option for ships but will require a global fueling infrastructure. However it will be the larger, better-capitalized companies that will be able to fund these improvements, likely accelerating industry consolidation. Renewable power generation presents both a challenge and an opportunity. For example, while wind farm generation can be unpredictable, small-scale hydrogen or synfuel plants can be positioned along transmission lines to use off-peak power (when it would otherwise not be utilized).
Coordinated push for carbon transition provides optimism - A virtuous circle is starting to emerge in which banks, bigger asset owners and high-quality end users are all focused on cooperating to reduce carbon reduction and promote sustainability. While undisciplined capital could reintroduce the overordering seen in the early 2000’s, on balance, we believe investors can find good opportunities in a transportation sector increasingly adopting sustainability goals and providing attractive, predictable, long-term returns.
Disruption doesn’t mean destruction - Disruption is temporary. We’re finding assets and companies that should return to normal (or bounce back stronger) as the world normalizes after COVID-19. We will be especially selective, looking to steer clear or sell companies and assets whose long-term decline has been accelerated by new trends or shifts in behavior, especially companies that increased leverage.
Defaults will be delayed - Heroic central bank liquidity measures and emergency loans successfully rescued public credit markets from a tidal wave of distress in 2020. But those policy actions did not eliminate defaults – they dispersed a giant wave into smaller, future ripples, creating several years of opportunities for our credit hedge fund and distressed and special situations teams.
Real asset lending takes the spotlight - We like asset-based property lending for income and expect to originate loans at better spreads and terms than pre-pandemic. And given the low cost of borrowing, we like using modest leverage to enhance income. Our asset-backed investing should be strengthened by the stability of the underlying assets that, beyond commercial properties, include critical new digital and green infrastructure.
Big deals produce headlines, but smaller deals can deliver differentiated results - While the largest buyout deals tend to grab headlines, we see attractive opportunities among firms with revenues of USD $10 million to USD $100 million. Despite increasingly competitive markets, these businesses can generally be purchased at lower valuation multiples with transaction structures less reliant on leverage.
Co-investing can potentially help investors reach PE program objectives - Co-investments offer limited partners (LPs) an opportunity to invest directly in an individual private company alongside a sponsor that leads the due diligence and is ultimately responsible for executing the deal. Relative to other types of private investment opportunities, co-investments have the potential to provide return enhancement, attractive economics, and increased visibility and discretion.
Technology and innovation continue to drive opportunities - Technology and innovation are transforming our lives, economies and businesses – and driving substantial value creation and return-enhancing opportunities in private equity. However, not all innovative ideas translate into sustainable, profitable businesses. Identifying the likely winners, ensuring that a detailed value-creation plan is in place and executed—and that downside risks are understood—requires a seasoned GP with deep sector knowledge and specialized skills. Two areas we see opportunity are in software-as-a-service and healthcare.
Opportunities in industrial and logistics boosted by pandemic - The industrial/logistics sector appears to be the greatest beneficiary of accelerating megatrends. The continuing shift to e-commerce, along with technological leaps in connectivity, cloud computing and the internet of things (IoT), is creating demand not only for traditional industrial assets but also for specialized core assets, including data centers, cold storage and truck terminals. The pandemic, with its social restrictions, distancing and adaptive work from home (WFH) practices, has amplified that demand.
Retail is down but not out - Retail properties have suffered significantly as COVID-19 has hastened the trend toward online purchases, however it is not time to abandon the sector but rather time to take a more discerning look at its variety of property types and be laser-focused on diligent asset selection. Retail property types have varying levels of susceptibility to online shopping and “necessity” retailers have fared better than those considered discretionary. Additionally, e-commerce penetration varies by regional market, as do retail property supply-demand dynamics. We see significant opportunity for operators that can reimagine and develop spaces in line with emerging retail models.
A brighter than consensus view on the office sector - We are more optimistic on the office sector than most. While working from home has accelerated under COVID-19, an optimal, sustainable home/office balance depends on economics and human nature - and may vary across businesses and regions. Some of the dynamics supporting our more constructive outlook include the ongoing need for collaboration for productivity, the growing share of office-using jobs and the need for companies to plan for peak office usage, even with flexible working arrangements.
Longer-term population dynamics continue to drive the outlook for residential - Opportunities within residential real estate around the globe are being driven primarily by population trends in place prior to the pandemic. COVID-19 may be impacting the speed of these trends, largely through work-from-home dynamics and limited access to the dining, shopping and cultural experiences that make urban centers vibrant, desirable places to live. The pandemic’s effect on demand is being felt unevenly across geographies, but we believe it is likely to be relatively short-lived.
To view the full 2021 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 50 years as an alternatives investment manager, $150 billion in assets under management and more than 600 professionals (as of September 30, 2020), we offer strategies across the alternative investment spectrum including real estate, private equity and credit, infrastructure, transportation, liquid alternatives, and hedge funds. Operating from offices throughout the Americas, Europe and Asia Pacific, our 14 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: jpmorganassetmanagement.com.
About J.P. Morgan Asset Management
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