J.P. Morgan Releases 2022 Long-Term Capital Market Assumptions, Urging Investors to Look Beyond Public Markets to Generate Returns
NEW YORK, November 8, 2021: J.P. Morgan Asset Management today released its 2022 Long-Term Capital Market Assumptions (LTCMAs), providing a 10-15-year outlook for risks and returns as the economic scars of the pandemic quickly fade, but policy impacts persist.
In the 26th edition of the research, expected returns remain low by historical standards, with
a 60/40 portfolio projected to return just 4.3 percent, suggesting that investors need to look beyond traditional asset markets to find higher returns. Additionally, this year’s research argues that while real bond yields will continue to lag, mispriced liquidity risk could make real assets serial winners.
This year’s research also features several thematic articles tackling issues top of mind for investors:
"We are increasingly convinced that the pandemic will leave behind few economic scars, however we expect the policy interventions at the height of the crisis will have a long-lasting impact on markets,” said John Bilton, Head of Global Multi-Asset Strategy, J.P. Morgan Asset Management. “Our overall message is optimistic, and those investors who are willing to expand opportunity sets and embrace sources of risk premia beyond traditional assets can still find ample sources of alpha to generate robust and efficient portfolio returns, even as public market return expectations remain muted.”
"For the first time in many years we have raised our long-term inflation projections across economies, driven by a somewhat different dynamic to that seen after the global financial crisis, as economies have quickly closed output gaps and fiscal and monetary policy work in partnership,” said Dr. David Kelly, Chief Global Strategist, J.P. Morgan Asset Management. "We expect modest real GDP growth by historical standards, with the heavyweight economies of U.S., China and India dragging on the outlook. While we anticipate productivity to grow, spurred on by the pandemic shock encouraging business adoption of technologies, the reality of weak demographics will continue to weigh on economic growth across both developed and emerging economies.”
Global Growth: We thus expect 2.2% real GDP growth for our set of economies over the next 10 to 15 years, vs. 2.9% from 2010 to 2020 and 2.7% from 2000 to 2020. We believe aggregate developed market (DM) growth, which we forecast at 1.5%, will run fairly close to its historical track record. But China’s ongoing deceleration pulls down the emerging market (EM) aggregate: We assume 3.7%, compared with 6.0% during the 20 years ended in 2020.
Global Inflation: For the first time in many years, we have raised our long-term inflation projections to 2.4% (up from 2.2%), and now see less risk of persistent deflationary pressures. We detect a different inflationary dynamic: Post-recession, output gaps are closing quickly; meanwhile, stimulative fiscal and monetary policies are working in partnership. The inflation manifesting itself in the late stages of the COVID-19 pandemic is proving a little stickier than the central banks expected.
Policy: The effect of pandemic policy choices will linger, and we must acknowledge that the very same bold fiscal and monetary policy that propelled us out of the pandemic gloom represents a seismic and lasting evolution of economic policy. Gone is a decade of sluggish capex, periodic austerity and weak productivity, offset by loose monetary policy. In its place, we find an emphasis on nominal growth and a greater willingness to tolerate larger balance sheets and higher national debt than we’ve seen since 1945. Emboldened by their pandemic policy success, governments are now focused on medium-term ambitions. Multi-year spending plans have already been laid out with an emphasis on rebuilding crumbling infrastructure, addressing social inequality and tackling climate change.
ASSET CLASS ASSUMPTIONS
Equities: We forecast an unchanged 4.10% annual return for U.S. large cap equities over our investment horizon, while the favorable margin and valuation impact improves our eurozone equity forecast 60bps, to 5.80%. We make a small cut of 10bps in Japan, to 5.00%, and a large downward adjustment of 260bps, to 4.10%, for UK stocks, where today’s sector mix points to substantial margin headwinds and likely multiple contraction. Emerging markets (EM) see a more modest 20bps dip, to 6.60%. These changes combine to pull our estimate of global equity returns down 10bps, to 5.00% in USD terms.
Fixed Income: While the outlook for government bonds remains dire, our forecasts for nominal bond returns improve from 2021. Higher starting yields and simply moving forward one year – such that our calculations drop one year of zero or negative policy rates and include a year of at least modestly higher rates at the end of the forecast horizon – improve bond returns. Together, these factors push our 10-year U.S. Treasury returns forecast 80bps higher to 2.40%, while USD cash returns forecasts are up by 20bps to 1.30%. Nevertheless, given our U.S. inflation estimate of 2.30%, this still implies negative real returns for cash and virtually zero real return for Treasuries, on average, across our forecast horizon. Outside the U.S., the picture looks bleak, with nominal government bond returns of just 1.25% for 10-year EUR and 1.70% for 10-year GBP, which imply significantly negative real returns.
Alternatives: Financial alternatives offer a marked uplift compared with public markets, with cap-weighted private equity up 30bps from last year, at 8.10%, and private debt offering 6.90%. The private debt expected return is a 10bps increase over 2021, and a much more favorable uplift when compared with public credit returns. While financial alternatives generally do have an equity beta, the additional returns available from manager selection can deliver a meaningful boost to portfolios. Real assets continue to stand out as an opportunity set that is both attractively valued – not having participated fully in the post-pandemic risk rally – and also likely to be resilient in multiple future states. In the near term, strong income streams in real estate, infrastructure and transportation assets are welcome when bond yields are compromised.
The LTCMAs are developed as part of a deep, proprietary research process that draws on quantitative and qualitative inputs as well as insights from a team of more than 30 experts across J.P. Morgan Asset Management. In its 26th year, these time-tested projections help build stronger portfolios, guide strategic asset allocations, and establish reasonable expectations for risk and returns over a 10 to 15-year timeframe for more than 200 major asset and strategy classes. These assumptions fuel decision-making in J.P. Morgan's multi-asset investing engine and inform client conversations throughout the year.
Please view the full 2022 Long-Term Capital Market Assumptions and thematic articles here.
About J.P. Morgan Asset Management
J.P. Morgan Asset Management, with assets under management of USD 2.7 trillion (as of 30 September 2021), 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. For more information: www.jpmorganassetmanagement.com.