Shifting landscapes and silver linings

This year’s LTCMAs launch finds us in a world evolving in significant ways. Shifting economic landscapes, including the rise of economic nationalism and renewed fiscal engagement, are testing investors but also offering silver linings.  

The increasing deployment of technology will drive near-term profitability and long-term productivity. Public and private investment will support growth, but over the coming decade investors will need to account for inflation and rate shocks as well as economic (growth) shocks.

Notably, JPMAM’s projections indicate that a balanced global portfolio stands to benefit from these evolving trends, with ample opportunities to strengthen portfolio resilience. They also see a broader set of possibilities for skilled active managers than perhaps ever before, in public and private asset markets.

‍Labour constraints weigh on US trend growth, modestly narrowing the US vs rest of world growth advantage, but do not preclude cyclical economic strength or solid asset returns. JPMAM expects investment to be front-loaded and believes technology adoption will provide a near-term boost to profits and a longer-term boost to productivity.

• Even after a year of strong equity market gains, asset returns hold up. Profitability offsets valuations for global stocks and higher term risk premia push up bond return forecasts. Their forecasted return for a simple USD global 60/40 stock-bond portfolio holds steady at 6.4%.
• JPMAM has high conviction in the profitability of U.S. corporates but acknowledge the impact of high valuations and a weakening dollar. Currency provides a tailwind to international stocks for USD-based investors and renews the focus on FX hedging for non-USD-based investors. Global stocks roughly double over their forecast horizon, given strong investment and resilient profits.
• Higher inflation volatility is a feature of their economic outlook and pushes up their forecasted returns for high quality bonds. Given higher starting yields and steeper curves, they project the best outlook for intermediate treasuries since the global financial crisis. Credit holds up, with better riskless returns offsetting tight spreads.
• As the investment cycle picks up, so, too, does the scope to harvest alpha. Private financial assets and hedge funds are well placed to benefit, while real assets offer compelling returns, given rising inflation volatility. For example, a 30% diversified alternatives allocation in a “60/40+” portfolio pushes returns to 6.9% and improves the Sharpe ratio by a quarter.
• The economic landscape is shifting palpably. But, in our view, much of what worries investors today will ultimately pale beside the silver linings we see breaking through over the long run.