Is this the road to normalization? Launching: 2015 market assumptions by J.P. Morgan Asset Management

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Nov 05, 2014, 10:14 ET

NEW YORK, Nov. 5, 2014 /PRNewswire/ -- The increased market turbulence in the last couple of weeks is driving investors to question if they should be repositioning their investment portfolios, whether the current volatility is a new normal, and what will happen to different asset classes as interest rates start to rise and inflation moves further up the agenda.

Now in its nineteenth year, the newly launched 2015 Long Term Capital Market Return Assumptions by J.P. Morgan Asset Management aims to help investors answer these burning questions and navigate the increasingly complex investment universe.

Anthony Werley, Chief Portfolio Strategist in J.P. Morgan Asset Management's Endowments and Foundations Group, and one of the leading authors of the paper, said, "It has been six years since the end of the great recession and we are certainly on the road to normalization. In general, due to continued headwinds, we believe that diversification across geographies and asset classes will be rewarded in the longer term."

He continued, "Globally, we see decoupling continuing as the eurozone and Japan actively pursue easier monetary policies and the monetary policy cycle turns in the UK and US. In the US, we believe growth will be constrained compared to prior cycles and that inflation will remain range bound. In addition, long-term nominal return expectations for US treasuries, corporate bonds and equities are more subdued and the implied risk premia arguably offers limited protection against any missteps in the policy normalization process."

The Assumptions put forward different considerations and opportunities for investors with different objectives, for example:

Opportunities for investors in search of diversification:
- Use diversified hedge funds as fixed income substitute
- Invest in commodities for their diversification benefit
- Add duration in non-US government bond markets where central banks are easing
Opportunities for investors in search of higher returns:
- Reconsider the case for emerging markets where valuations are lower and top-line growth is likely to be higher
- Add direct or indirect leverage while funding rates are low
- Invest in less liquid markets such as value-added real estate and private equity

As well as providing vital information to investment decision makers across all types of investors, including pension funds, wealth managers, insurance companies and endowments, the Assumptions also form the investment principles around J.P. Morgan Asset Management's multi-asset portfolios, which include defined contribution target date funds, multi-asset income funds and tailored strategies within the Solutions Group.

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Navigating the white paper

Section 1: Thematic articles

Analyze long-term market trends across asset classes and the global economy
Understand the research and other aspects of the concepts underlying our Assumptions
Discuss strategic asset allocation and portfolio construction issues facing long-term investors

Section II: Rationale articles

Understand how we arrive at our Assumptions for macroeconomic fundamentals, fixed income, equity, alternatives, foreign exchange, volatilities and correlations
Review the key findings of our research and view selected projections

Section III: Long-Term Capital Market Return Assumptions

Explore our return and volatility projections for approximately 50 asset classes in USD/EUR/GBP
Find the cross-asset correlation assumptions for our entire data set

How to use the numbers

Our Assumptions can be used by clients in a number of ways:

Develop or review a strategic asset allocation
Understand the available risk and return trade-offs across asset classes and within asset classes across regions
Make new, and review existing, relative value allocation decisions
Use the correlation and volatility data to analyse the risk characteristics of a strategic asset allocation

Examples:

Investors may want to explore what opportunities exist to diversify their fixed income allocation ahead of a change in central bank monetary policy.
After a period of strong returns in US equities, investors may also want to find out what opportunities may exist in other markets.
The assumptions can be used as a key input into an asset allocation model or simulation, such as the MAPS model that is used extensively by the J.P. Morgan Private Bank.

About J.P. Morgan Asset Management

J.P. Morgan Asset Management is part of JPMorgan Chase & Co. and is a global asset management leader providing world-class investment solutions to clients. With US$1.7 trillion in assets under management (the Asset Management client funds of JPMorgan Chase & Co. as at September 30, 2014) and offices in 41 locations around the world, J.P. Morgan Asset Management offers global coverage with a strong local market presence, and leadership positions in most asset classes.

Any past performance referred to in this material is not a guide to future performance and the value of investments, and any income from them, can fall as well as rise. Any tax concessions referred to are not guaranteed and their value will depend on the individual circumstances of investors. Stock market linked investments carry a number of inherent risks. These risks will increase where fluctuations in exchange rates impact on the value of any underlying investments or where the investment is exposed to smaller companies or emerging markets. Investments in fixed income securities that are not rated as investment grade represent a greater risk to an investor's capital.

SOURCE J.P. Morgan Asset Management