J.P. Morgan Releases 2019 Long-Term Capital Market Assumptions, Analysis Reveals Need to Be Wary of Cyclical Risks and Prepare for Next Downturn

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Oct 31, 2018, 14:00 ET

NEW YORK, Oct. 31, 2018 /PRNewswire/ -- J.P. Morgan Asset Management released its 2019 Long-Term Capital Market Assumptions (LTCMAs), focused this year on helping investors and advisors understand the headwinds and opportunities in the current late-cycle economy. The research shows that while long-term optimism remains, today's mature economic environment demands that investors evaluate how turning points in the cycle might lead to unexpected outcomes, even in diversified portfolios.

"Our 2019 assumptions come at a time of intense speculation about when the current cycle of economic expansion may end. While trying to precisely time the downturn is likely futile, understanding the complexities of the late cycle and preparing for the next phase is a vital exercise," said John Bilton, Head of Global Multi-Asset Strategy, J.P. Morgan Asset Management. "To manage headwinds and capture opportunities in the coming years, investors need to evaluate and optimize existing investment frameworks to better reflect tail risks."

"The current bull market has delivered peak to trough gains almost twice the bull market average of the past 50 years," said Dr. David Kelly, Chief Global Strategist, J.P. Morgan Asset Management. "Our assumptions acknowledge that these returns are unlikely to be maintained in the long run. However, investors also need to recognize how both long-term structural changes in the global economy and more recent dislocations in the aftermath of the global financial crisis can impact the long-term path of portfolio returns and risks."

KEY FINDINGS

Global GDP - Our 2019 estimate for real global GDP growth of 2.5% is unchanged from last year, and despite a few adjustments at the country level, the growth outlook is stable and risks are balanced. Asset returns at equilibrium look reasonable by historic standards, but cyclical headwinds constrain our return forecasts and present a challenge for investors.

Cyclical risks - Cyclical risks are building and many economies are operating above trend and with limited slack, while many asset valuations are elevated. While long-term investors should consider returns over the whole cycle, the entry point matters greatly to the long-term outlook. Traditional investment frameworks may not capture factors like illiquidity risk which can profoundly affect asset returns late in the cycle.

Asset class returns- Bond return forecasts are a little higher this year, notably in the U.S. where policy normalization has created a favorable entry point. Global equity returns are unchanged but there is some regional divergence, which may offer opportunities for investors. Alternatives are a relative bright spot, as fee reduction and improved alpha trends lend support.

60/40 portfolio returns - Expected returns for a U.S. 60/40 stock/bond portfolio are slightly better, at 5.50%, up from 5.25%, interestingly, due to higher expected bond returns. In other regions the stock/bond frontier is little changed. This reflects both the late cycle environment in the U.S. and the regional divergence in economic cycles. Sharpe ratios for U.S. government bonds now exceed those of U.S. stocks for the first time since the financial crisis.

Managing outside the mean - This means looking for insight beyond our traditional mean-variance tools to help us navigate the end of this cycle. In the longer term it implies that while mean reversion is a powerful force, it isn't infallible and we must be mindful of which of today's dislocations may be tomorrow's new equilibria.

ASSET CLASS ASSUMPTIONS

Equities: Equity return forecasts for 2019 reflect the variation in regional fortunes over the last year. The outlook for U.S. equities has fallen slightly and the U.S. equity risk premium (ERP) is now below long-term averages. Forecasts for EM (Emerging Market) equities have risen, slightly widening the gap between DM and EM equity return forecasts. The equilibrium return assumptions for global equities are stable and reasonably attractive.

Fixed Income: Cash rates are expected to rise further in this cycle but we see less upside risk to long-end yields, likely leading to a flat or inverted yield curve at the end of this cycle, albeit at lower absolute rate levels. Lower rates and flatter curves are seen as a secular condition over the next 10- to 15-years, a view that reflects our dovish inflation outlook and anticipation of extended periods of stimulus as future business cycles elongate. Credit and EM debt still offer the best return possibilities across fixed income over our forecast horizon.

Alternatives: We see alternative assets as a bright spot in the 2019 assumptions, with improving alpha expectations in private equity resulting in an upgrade to our outlook this year. Given the paucity of returns in traditional asset classes, we expect that capital will continue to flood into alternative assets in search of enhanced returns. Manager selection remains the primary determinant of returns across alternatives.

Foreign Exchange: Currency forecasts are little changed, reflecting the relative stability in the long-term outlook this year. While the U.S. dollar remains well above fair value, we expect it to weaken against most major crosses over our forecast horizon, boosting returns from international diversification for USD-based investors, but having the opposite effect for non-dollar based investors. Despite concerns over U.S. deficits and debt dynamics that will only increase as time passes, we see little challenge to the dollar as the world's reserve currency over our forecast horizon.

In addition to covering key findings, the research explores four important themes in depth, including:

The taming of the business cycle – Fewer recessions and weaker recoveries
Will debt be a drag? – Dealing with the upward drift in government debt
The evolution of market structure - Managing illiquidity risk across public and private markets
Surviving the short-term to thrive in the long-term – Building investor resilience in a downturn

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 23^rd 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 50 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 2019 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 $1.8 trillion (as of September 30, 2018), 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.

JPMorgan Chase & Co. (NYSE: JPM) is a leading global financial services firm with assets of $2.6 trillion (as of September 30, 2018) and operations worldwide. The Firm is a leader in investment banking, financial services for consumers and small businesses, commercial banking, financial transaction processing, and asset management. A component of the Dow Jones Industrial Average, JPMorgan Chase & Co. serves millions of customers in the United States and many of the world's most prominent corporate, institutional and government clients under its J.P. Morgan and Chase brands. Information about JPMorgan Chase & Co. is available at www.jpmorganchase.com.

J.P. Morgan Asset Management is the marketing name for the asset management businesses of JPMorgan Chase & Co., and its affiliates worldwide.

The resulting projections derived from the J.P. Morgan Asset Management ("JPMAM") Long Term Capital Market Assumptions include only the benchmark return associated with the portfolio and does not include alpha from the underlying product strategies within each asset class. The assumptions are presented for illustrative purposes only. They must not be used, or relied upon, to make investment decisions. The assumptions are not meant to be a representation of, nor should they be interpreted as JPMAM investment recommendations. Allocations, assumptions, and expected returns are not meant to represent JPMAM performance. Please note all information shown is based on assumptions, therefore, exclusive reliance on these assumptions is incomplete and not advised. The individual asset class assumptions are not a promise of future performance. Note that these asset class assumptions are passive-only; they do not consider the impact of active management.

Opinions and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. References to specific securities, asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations. The information in this piece is not intended to provide and should not be relied on for accounting, legal, and tax advice or investment recommendations.

SOURCE J.P. Morgan Asset Management