Investment Strategy
Introducing the 29th edition of Long-Term Capital Market Assumptions
U.S. equities are on track for their first weekly decline in seven weeks.
Investors are recalibrating what stronger economic data and potential fiscal expansion could mean for the Federal Reserve and interest rates. That’s pushed rates higher this week, and lowered market expectations of rate cuts this cycle.
Earnings season continues, with ~33% of S&P 500 companies having reported with a 3.5% year-over-year growth rate.
Below we review the release of J.P. Morgan Asset Management’s 29th Long-Term Capital Market Assumptions.
The Long-Term Capital Market Assumptions
Day trading, quarterly earnings and the newest economic data release all seem to dominate day-to-day financial headlines. Today, we are taking a step back from the “short-termism” of modern finance and shifting focus to the long term.
The 29th edition of J.P. Morgan Asset Management’s Long-Term Capital Market Assumptions (LTCMAs) was released this week. The document provides return and risk expectations for more than 200 assets and strategies in 19 base currencies. Importantly, as the name would suggest, these assumptions are for the long term (10–15 years), and should help guide investors when making strategic portfolio allocation decisions.
What’s changed in this year’s edition?
The headline change is that the return assumptions for a global 60/40 (stocks/bonds) portfolio has declined 60 basis points. The drop in the expected return on a year-over-year basis is the result of declining returns in both equity and fixed income. But the why is important to understand.
It’s the starting point. For equities, the impressive nearly 20% year-to-date global equity rally has led to higher starting valuations, particularly in the tech sector. Starting at a higher level lowers return expectations, all else equal.
For fixed income, economic resilience, especially in the United States, has led to tighter credit spreads. Investment grade and high yield spreads (the compensation an investor receives for investing in riskier bonds) are below their 20-year average—although elevated base yields combined with easing monetary policy should help drive positive returns.
With the prospect of lower returns for equities and fixed income in mind, there is some good news. The reward for taking public market 60/40 risk remains solid (and significantly above the forecasted returns of just four years ago.)
Grounding ourselves in the solid fundamentals
Despite lower return assumptions, the global economy’s resilience has surprised to the upside. Here are some of the positives:
- The “misery index,” which is the sum of YoY CPI (2.4%) and the unemployment rate (4.1%), stands at 6.5%—that’s lower than it’s been 85% of the time in the last 50 years.
The “misery index” is lower than it’s been 85% of the time in the last 50 years
Misery index, %
Sources: Bureau of Labor Statistics, Haver Analytics. Data as of September 30, 2024. Note: Misery index is year-over-year CPI plus the unemployment rate.
- Inflation seems like it was a cyclical event driven by the pandemic. The LTCMAs’ marked down U.S. long-term inflation from 2.5% to 2.4%.
- Global central banks are easing policy, which should support growth and valuations; G7 nominal growth expectations have risen for the fifth year in a row.
Lower inflation and stronger economic growth create a favorable investing backdrop that lends itself to opportunities across asset classes.
Opportunities in the “healthier and higher” era
Artificial intelligence: We’re believers that AI can help us to create a vastly more productive economy. This year, we boosted the impact of AI on developed market GDP growth to 0.2% per year. This upgrade largely reflects the strength of capital investment in AI.
Alternatives: We still see alternatives offering investors alpha, income and diversification. However, we think the dispersion of these outcomes will be wider than what investors experienced in the 2010s. Higher interest rates, increasing capital investment and rising geopolitical risks will all play a crucial part in shaping those outcomes.
Real estate: Elevated rates and challenging debt markets have driven down commercial real estate values.
Commercial real estate property prices experienced their third decline
Price level, 2006=100
Sources: NCREIF, Bloomberg Finance L.P. Data as of June 30, 2024.
We see a generational opportunity emerging for long-term real estate investors as a direct result of valuations significantly re-rating. This shift improves return expectations for core assets in the United States, Europe and the United Kingdom due to higher entry yields. Our 2025 long-term return assumption for U.S. core real estate surges to 8.1% from last year’s 7.5%. Importantly, real estate is not a monolith, and our value-add return assumption climbs to 10.1% from 9.7%. Overall, the current environment has created timely opportunities for investors across the risk spectrum.
Non-core real estate has the highest real asset expected return
LTCMA return expectations (USD), %
Source: J.P. Morgan Asset Management. Estimates as of September 30, 2024. Note: All return assumptions incorporate leverage
Private equity: Private equity (PE) faces a number of headwinds, including the higher cost of capital; recent fund vintages’ elevated purchase price multiples; historically high levels of uncalled-yet-committed investment capital (dry powder); and a difficult exit environment. While some of these challenges present formidable obstacles to generating returns at a premium to what is available in the public markets, our expectation of a friendlier exit environment leads us to boost our return estimate from 9.7% to 9.9% for the cap-weighted composite. Importantly, alternatives as an asset class produces a wide dispersion of returns, making manager selection key.
Private manager return dispersion
Range of returns based on returns over a 10-year window
Sources: Burgiss, NCREIF, Morningstar, PivotalPath, J.P. Morgan Asset Management. *Manager dispersion is based on the annual returns for U.S. Fund Global Equities, U.S. Fund Global Bonds, Hedge Funds, and U.S. Core Real Estate are over a 10-year period ending 3Q 2023. Non-core Real Estate, Global Private Equity and Global Venture Capital are represented by the 10-year horizon internal rate of return (IRR) ending 2Q 2023. Data as of November 30, 2023.
Active management and diversification: In certain equity markets, a small number of companies dominate. This concentration increases single-stock risk, and biases portfolios toward a sector (technology) and a style (growth). Historically, the largest companies in the S&P 500 have rarely stayed constant across decades.
The U.S. stock market has seen big shifts in sector composition over time
Bloomberg U.S. Large Cap Index, BICS sector weights, %
Source: Bloomberg Finance L.P. Data as of September 30, 2024
Thus there is a need to rebalance portfolios. For example, if you invested in a 60/40 U.S. stock and bond portfolio at the beginning of 2020, it would now be an 80/20 stock/bond allocation without rebalancing.
We note as well that today’s levels of market dominance face several challenges, including business competition and government regulation. The current outlook for lower returns in equity and fixed income increases the relative benefits of potential alpha driven by active management in public markets.
Additional diversification can be achieved by investing across geographies. Governance-led reforms, an escape from deflation and capital returning to shareholders have resulted in Japanese equities offering the highest return expectations in five years (8.3%). We also believe the U.S. dollar is structurally overvalued, and that dollar-based investors should diversify their currency exposures.
Importance of portfolio construction
The release of the LTCMAs is a good reminder to take a step back from the day-to-day noise and recalibrate our portfolios for the long term. Investors will have different strategic allocations in their portfolios depending on their goals. As such, it’s important to revisit them and recalibrate as needed. As always, your J.P. Morgan team is here to help.
All market and economic data as of October 2024 and sourced from Bloomberg Finance L.P. and FactSet unless otherwise stated.
Private Equity is typically composed of Venture Capital, Leveraged Buyouts, Distressed Investments and Mezzanine Financing, which are all generally considered to be high risk, illiquid investments designed to deliver larger expected returns than publicly traded securities as compensation for their greater risk. As a result, investing in Private Equity is not suitable for all investors.
ALTERNATIVE INVESTMENTS
Private investments are subject to special risks. Individuals must meet specific suitability standards before investing. This information does not constitute an offer to sell or a solicitation of an offer to buy . As a reminder, hedge funds (or funds of hedge funds), private equity funds, real estate funds often engage in leveraging and other speculative investment practices that may increase the risk of investment loss. These investments can be highly illiquid, and are not required to provide periodic pricing or valuation information to investors.
FIXED INCOME
Investing in fixed income products is subject to certain risks, including interest rate, credit, inflation, call, prepayment, and reinvestment risk.
EQUITIES
The price of equity securities may rise or fall due to the changes in the broad market or changes in a company's financial condition, sometimes rapidly or unpredictably. Equity securities are subject to "stock market risk" meaning that stock prices in general may decline over short or extended periods of time.
International Investments
International investments may not be suitable for all investors. International investing involves a greater degree of risk and increased volatility. Changes in currency exchange rates and differences in accounting and taxation policies outside the U.S. can raise or lower returns. Some overseas markets may not be as politically and economically stable as the United States and other nations. Investments in international markets can be more volatile.
We believe the information contained in this material to be reliable but do not warrant its accuracy or completeness. Opinions, estimates, and investment strategies and views expressed in this document constitute our judgment based on current market conditions and are subject to change without notice.
RISK CONSIDERATIONS
- Past performance is not indicative of future results. You may not invest directly in an index.
- The prices and rates of return are indicative, as they may vary over time based on market conditions.
- Additional risk considerations exist for all strategies.
- The information provided herein is not intended as a recommendation of or an offer or solicitation to purchase or sell any investment product or service.
- Opinions expressed herein may differ from the opinions expressed by other areas of J.P. Morgan. This material should not be regarded as investment research or a J.P. Morgan investment research report.
We step back from the “short-termism” of modern finance to review the bigger picture.
Alan Wynne
Global Investment Strategist
Published Oct 25, 2024
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