One of the investment industry big-hitters sets out its medium-term forecasts for global growth, equity and other asset class returns.

Research from JP Morgan Asset Management, which oversees $1.9 trillion of client money, reckons that global economic growth will be sluggish in the next 10 to 15 years; while equities will produce higher returns than bonds, it looks as though the heyday for big gains on stocks is past.

The outlook comes from the US firm’s 2020 Long-Term Capital Market Assumptions; it covers the average annual returns investors can expect for more than 50 major asset classes.

The report’s gross domestic product forecasts declined for emerging markets including Asia, most notably for China. JPMAM predicts that China’s GDP growth is likely to fall to an average 4.4 per cent annually over the next 10 to 15 years – considerably lower than its double-digit average pace over the last few decades, but still rapid for a large economy.

“Investors are rethinking ‘safe-havens’ in their portfolios now that bonds simply will not offer the same combination of portfolio protection and positive income that they have in the past,” Patrik Schöwitz, global multi-asset strategist, JPMAM, said.

The report also suggests that financial market trends will take center stage in China in coming years. 

“Capital markets will likely develop faster than the rate of GDP growth, deepening opportunities for foreign investors. Sector shifts will occur within markets and the composition of listed equities is likely to change significantly (though banks may well remain more prominent than elsewhere), creating nuanced investment opportunities,” Hannah Anderson, global market strategist, JPMAM, said.

Investment houses, while mindful that predicting the future appears futile, typically roll out forecasts at this time of the year, if only to give clients some idea of what sort of asset allocation doctrine makes sense. The wealth management sector is still grappling with how to preserve wealth in an environment where, in many cases, cash yields are zero or negative in real terms. This has forced many clients up the risk and illiquidity spectrum, raising questions about how long that can endure. For example, the US Federal Reserve has cut interest rates three times this year, raising questions over what spare ammunition the central bank has if or when markets fall significantly or the economy goes into recession.

Findings
Real global growth (when inflation is stripped out) is expected to average 2.3 per cent over the next 10-15 years, down 20 basis points (bps) from our projections last year. The developed market forecast remains unchanged at 1.5 per cent but emerging market forecasts have been trimmed by 35 bps to 3.9 per cent. Population aging is broadly to blame for the lower forecasts for global growth.

Projections for global inflation are little changed from last year, with the global consumer price index forecast at 2.2 per cent. In many countries, however, inflation will remain below this figure, particularly those such as Japan and Switzerland which have had many years of extremely low nominal rates, the firm said.
 

Global monetary policy is expected to remain “extremely accommodative” throughout this cycle and well into the next one, leading to a significant delay in interest rate normalization being built into forecasts, it said. 

JPMAM said the long-term return outlook for equities is slightly better in its 2020 outlook than in the 2019 edition. Average global equity return forecasts over the next 10-15 years will rise 50 bps to 6.5 per cent dollar terms. The forecast for developed markets is up 20 bps to 5.7 per cent, and for emerging markets it is raised 20 bps, to 8.7 per cent in local currency terms. In developed markets, the majority of this improvement is the result of cheaper starting valuations, while in EM markets the boost is more evenly split between earnings and valuation.

Cash return forecasts in most major currencies are lower as normalization assumptions have been extended. This year’s assumptions include an explicit ranking of real cash rates across major markets, the firm said. 

The firm added that it expects private equity market returns to rise, if not spectacularly. The 10-15 year aggregate private equity return forecast has been raised by 55 bps to 8.8 per cent. Private equity “continues to be attractive to those investors looking for return uplift, as well as those seeking more specific exposure to technology themes”, the firm said.

“This year we forecast that core US real estate returns, levered, net of fees, will average 5.8 per cent over the next 10-15 years. Casting the net more widely, forecast returns from global real assets and infrastructure have held up remarkably well, and given the resilience of their cash flows they may even act as a proxy for duration in portfolios with limited short run liquidity demands. Manager selection remains the primary determinant of returns across alternatives,” the firm added.