How to build a smart strategy for the long term - J.P. Morgan Asset Management
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How to build a smart strategy for the long term

Contributor Michael Feser

Volatile markets can be distracting; the latest statistical release, report on China or reading of the Federal Reserve tea leaves can cause the markets to fluctuate—and send investors scurrying for cover or to seize perceived opportunity. Staying on top of market developments is important, but having a long-term, cohesive view of the global economy and markets is essential for reaching ultimate investment objectives. A comprehensive 10-to-15-year perspective can help investors build resilient portfolios and remain focused on their long-term goals, whether that is a secure retirement, a child’s education, a new home or other targeted outcomes.

For two decades, investors and their advisors have relied on J.P. Morgan Asset Management’s Long-Term Capital Market Assumptions (LTCMAs) when defining and analyzing strategic portfolio allocations and to gain a realistic view of what the markets are likely to deliver over the long term.

A globally divergent macro outlook

The backdrop for this year’s Assumptions is an environment characterized by steady inflation, subdued long-term growth and diverging regional dynamics. Long-term growth in developed markets will be tempered by the adverse impact of an aging population while short-term growth prospects in emerging markets will be dampened by the need for financial deleveraging, slow developed market growth and more modest commodity prices. Monetary policies are also expected to diverge as the Federal Reserve’s policy-setting committee begins to raise interest rates while Japanese and euro area policymakers are likely to ease even further before considering steps toward interest normalization.

A cohesive multi-asset class perspective

Those foundational assumptions, along with the best thinking of our global network of asset class specialists, are carried through a building block approach we use to formulate our estimates at the asset class level—now encompassing returns, volatilities and correlations for over 50 asset classes.

Traditional market returns over the next 10 to 15 years will remain generally below historical long-term averages. Exhibits 1A-1B illustrate this point for U.S. markets. Investors should ensure that they are saving enough to reach their long-term goals, given realistic return expectations.

OVERALL, TRADITIONAL MARKET EXPECTED RETURNS ARE NOT INSPIRATIONAL, RELATIVE TO THE PAST.

An examination of our risk and return estimates across major asset classes for 2016 vs. 2015 suggests that investors willing and able to step out along the risk curve can expect to be somewhat better compensated for taking on that incremental risk than in the past. As seen in Exhibit 2, the efficient frontier (a mapping of expected returns for a range of optimal portfolios with varying levels of risk) has rotated in a counterclockwise direction. For investors, this implies that the expected long-term return for relatively safer assets has fallen while the expected return for riskier assets has improved relative to last year’s outlook.

OUR 2016 VS. 2015 ASSUMPTIONS SUGGEST THAT LONG-TERM INVESTORS WILLING TO STEP OUT ON THE RISK CURVE CAN EXPECT TO BE BETTER COMPENSATED FOR THAT INCREMENTAL RISK.

There are bright spots. As shown in Exhibit 2, U.S. high yield bonds appear relatively attractive, offering close to equity-like returns with superior risk characteristics. Ongoing demand for yield and limited leverage during a long but shallow economic cycle should provide support. Additionally, the entrance of more established, larger issuers, while increasing issuer risk concentration, has improved the average credit quality, average issue size and liquidity of the market.

Investment implications

With a long-term outlook characterized by globally divergent growth and a staggered liftoff in rates, investors need to remain diversified by asset class and region. Investors able to move among global markets and asset classes as regional growth cycles unfold can use this flexibility to enhance returns in a generally modest return environment.

Learn more about our 2015 Long-term Capital Market Assumptions here: http://imowcs-mgmt.jpmchase.net/us/en/asset-management/gim/adv/insights/long-term-capital-market-assumptions-2016


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