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“Plentiful opportunities for investors” despite forecasts – JP Morgan
Post-pandemic, the global economic recovery has been effective, buoyed by strong government stimulus, both fiscal and monetary. While most of the world suffered limited scarring, many of the policy choices that were made will have an enduring impact, according to JP Morgan.
The group presented its 2022 Long-Term Capital Market Assumptions (LTCMAs) which gave a 10-15 year outlook for risks and returns.
The message is clear: “Despite low return expectations in public markets, we see plentiful opportunities for investors.”
Patrik Schöwitz, global multi-asset strategist at J.P. Morgan Asset Management, says, “Almost two years after the pandemic struck, the global economic recovery has seen strong momentum. While the economy has suffered limited scarring, policy choices have an enduring impact on the global economy and asset markets. This year, we raised long-term inflation projections for the first time in many years. Despite high inflation and low return expectations in public markets, we see plentiful opportunities for investors who are willing to expand opportunity sets beyond publicly traded assets and core markets.”
JP Morgan Asset Management is confident the economic scars from the pandemic are quickly fading and has lifted its nominal growth forecasts for developed markets by 10 basis points, to 3.30%. Expected returns will remain low by historical standards, at around 4.30%. But JPM says “the good news is, investors can find ample risk premia to harvest if they are prepared to look beyond traditional asset markets and past the familiar market risk-return trade-off.”
The use of fiscal stimulus and negative real rates to give the economy a massive boost has stirred-up concerns of rising inflation and the downside risks to economic growth. JP Morgan raises its long-term inflation projections to 2.4% (up from 2.2%) and sees a different inflationary dynamic:
Post-pandemic, in the later stages, “the emphasis is on nominal growth and a greater willingness to tolerate larger balance sheets and higher levels of government debt than we’ve seen since 1945,” it says. “Governments are more focused on medium-term ambitions unveiling spending plans to rebuild infrastructure, address social inequality and tackle climate change.
So where should investors look to invest?
J.P Morgan says investors need to take a considered approach which looks beyond public equity markets and includes alternatives and private assets which have held up remarkably well this year. Real assets also stand out as an opportunity that is both attractively valued and resilient in multiple future states. A big positive is that there are strong income streams in real estate, infrastructure and transportation assets that are stable and offer resilience to inflation.
Investors also cannot ignore the environmental, social and governance (ESG) investment boom currently underway. JP Morgan says the ESG boom won’t hamper financial returns nor reduce the opportunity set by focusing solely on assets for which scores are easily available, or score highly. Sustainable investing might once have been about “doing good”; it is now as much about “doing well.”
J.P Morgan speaks favourably about alternative investments, which have had an edge over public markets, with “cap-weighted private equity up 30bps from last year, at 8.10%, and private debt offering 6.90%.” This was a positive uplift when compared with public credit returns.
And finally, the team looks at cryptocurrencies, which are not yet available as a portfolio asset on its own. Investors attracted to crypto’s unstable correlations to other assets should think of it “as a call on a future disruptive technology” rather than a substitute for a currency or gold.
While the pandemic did bring about volatility and fear, the reality is investors need to focus on building a portfolio that captures above-trend growth that can adapt to a changing environment. Avoid focusing on the negative. Investors will need to search harder for yield and look to assets that are doing well with an acceptable trade-off between volatility and liquidity.
