Long-Term Capital Market Assumptions
2022
Fading scars, enduring policies
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LTCMAs by the numbers…
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Key takeaways from the 2022 LTCMAs
Fading scars, enduring policies
Post-pandemic, the economy has suffered limited scarring, but policy choices will have an enduring impact
The new old normal
Improving productivity keeps growth forecasts broadly stable, but we now see upside as well as downside risks to inflation
Long term themes set the tone
Key secular issues like ESG, new asset markets, and disruptive forces like crypto are shaping the investment landscape
Low real rates hold back bonds
Sovereign and IG returns a little better, but the outlook remains bleak as rates rise further; high yield returns a little lower
Stable, if cyclical, equity returns
Changing sector mix implies more resilient margins and valuations, but an active stance is more important than ever
Full spectrum investing
Many alpha levers available: active management in public markets, international diversification, and alternative assets
Source: J.P. Morgan Asset Management; estimates as of September 30, 2021.
Outlooks and past performance are not reliable indicators of future results. Opinions, estimates, forecasts, projections and statements of financial market trends that are based on current market conditions constitute our judgment and are
subject to change without notice. There can be no guarantee they will be met. For further information, see “Understanding long-term estimates” at the end of this presentation.
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The long-term picture: 10-15 year risk-return outlook
60/40 marginally higher
Stock-bond frontiers: 2022 vs. 2021 and 2008 assumptions (USD)
USD 60/40 return forecast increases from
4.2% to 4.3%, led by the bond component.
9%
Private Equity
8%
Wide dispersion of asset returns
U.S. Core RE
6%
Compound Return
EM Equity
EAFE Equity
7%
EM Debt (HC)
Bond returns are higher this year but
remain low by historical standards.
Alternatives offer attractive returns,
monetizing a range of risk premia.
AC World Equity
5%
Div. Hedge
Funds
U.S. Large Cap
4%
U.S. HY
3% U.S. Agg Bonds
U.S. Intermediate
Treasuries
2%
World Government
Bonds (H)
1%
Post-COVID19 distinct to post-GFC
U.S. Cash
0%
0%
5%
2008 Stock-Bond Frontier
60/40 Portfolio (2008)
10%
15%
Volatility
2021 Stock-Bond Frontier
60/40 Portfolio (2021)
20%
25%
2022 Stock-Bond Frontier
60/40 Portfolio (2022)
Beta no longer enough: low return
expectations make active management
and alpha important.
Source: J.P. Morgan Asset Management; estimates as of September 2007, September 2020 and September 2021. *EM: Emerging Markets; DM: Developed Markets.
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The near term picture: MAS 4Q21 asset allocation views
Asset class
Equities
MAIN
Duration
ASSET
Credit
CLASSES
Cash
Europe
UK
Japan
FIXED INCOME
Emerging markets
CURRENCY
MAIN ASSET CLASSES
EQUITY
U.S.
U.S. Treasuries
G4 ex-U.S. sovereigns
EMD hard currency
EMD local FX
Corporate inv. grade
Corporate high yield
USD
EUR
JPY
EM FX
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OW Chg Conviction
High
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Low
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Low
l
Moderate
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Moderate
l
Moderate
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Moderate
l
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Low
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Moderate
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Key Takeaways and “Big ideas”
▪ Global growth above trend, U.S. in mid-cycle, Rest of World a little further back
▪ Inflation elevated for now, but set to return toward target in 2022
▪ Fiscal and monetary policy accommodative but focus is on Fed tapering
▪ Yields drift up slowly; negative stock-bond correlation back in play
▪ Dollar supported near-term by rates, but long-run trend likely to be lower
▪ Further EPS upside supports stocks while multiples decline further
▪ OW equities balanced across developed market regions; still too soon for EM
▪ Prefer a blend of quality, value and cyclical sectors in equities
▪ Key risks: supply chain issues, new virus strains, growth disappoints
Source: J.P. Morgan Asset Management Multi-Asset Solutions; assessments are made using data and information up to
Sept 2021. For illustration only. These asset class views apply to a 12- to 18- month horizon. Up/down arrows indicate a
positive (↑) or negative (↓) change in view since the prior quarterly Strategy Summit. This summary of our individual asset
class views shows relative direction and strength of conviction, but is independent of portfolio construction considerations.
These views should not be construed as a recommended portfolio. The opinions and views expressed here are those held
by the author at the date of publication which are subject to change and are not to be taken as or construed as investment
advice. Forecasts, projections and other forward looking statements are based upon current beliefs and expectations. They
are for illustrative purposes only and serve as an indication of what may occur. Given the inherent uncertainties and risks
associated with forecasts, projections and other forward statements, actual events, results or performance may differ
materially from those reflected or contemplated.
Fading scars, enduring policies
Global government debt % of GDP
Contributions (%) to DM Real GDP Growth Forecasts
DM and EM debt/GDP
140
120
2,0%
2021
1,5%
0,7
2022
0,8
2021
2021
2022
0,6
100
1,0%
80
0,4
0,8
0,7
0,8
60
0,6
0,5%
40
2022
2021
2022
0,5
0,7
0,5
0,6
0,5
0,5
0,4
20
0,0%
WW1
WW2
GFC
0,3
0,1
0,1
-0,2
0,0
CV19
0,2
0,2
-0,2
0,2
0
1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020
-0,5%
US
Advanced Economies
Emerging Markets
EMU
Labor
JP
Capital
UK
TFP
Source: Our World in Data, IIF, OECD, IMF, J.P. Morgan Asset Management. . Values are GDP weighted. Short-term interest rates are the rates at which short-term borrowings are affected between financial institutions or the rate at which short-term government paper is issued or traded in the market. *2021
growth rate figures are shown relative to 2019. Data are as of October 31, 2021. Contributions do not include the cyclical bonuses incorporated into 2021 LTCMA real GDP forecasts. TFP-Total Factor Productivity. EMU-European Monetary Union.
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Slow moving forces are creating upward inflation pressure
Long-term influence on U.S. Inflation
Impact on U.S. inflation
Economic Forces
Last global expansion (2008-2019)
Next 10-15 years
Income distribution
-+
0
+
?
+
+
-0
+
Globalization
Dollar
Fiscal policy
Online markets & information availability
Energy spikes
Union membership
ESG
Source: J.P. Morgan Asset Management; forecasts and assumptions as of September 30, 2021.
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Despite a year of strong returns, LTCMA forecasts are quite stable
Selected assets, 10-15yr average annual expected returns
35%
1,3%
1,1%
U.S. Cash
U.S. Treasuries*
1,5%
Selected assets, returns from 9/30/2020 to 9/30/2021
30,0%
2022 LTCMA
2,1%
30%
2021 LTCMA
2,8%
2,5%
U.S. IG
4,8%
EAFE Equity
5%
6,9%
7,2%
EM Equity
0,1%
0%
5,8%
5,9%
U.S. Core Real Est
-5%
4,3%
4,2%
1%
2%
3%
4%
5%
Source: Bloomberg, J.P. Morgan Asset Management; data as of September 2020 and September 2021.
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11,3%
10%
6,5%
6,5%
60/40 Portfolio
13,6%
15%
4,1%
4,1%
U.S. Large Cap
0%
18,2%
20%
3,9%
U.S. HYs
25,7%
25%
6%
7%
8%
-1,4%
1,7%
16,1%
But even then, beta alone can’t deliver the returns we want
There is a 2-pt gap between historic 60/40 returns and our forecasts…
…due largely to a difficult starting point of low yields and high valuations
10%
12%
Delivered 60/40 Returns
(ACWI / U.S. Agg)
10%
LTCMA 60/40 Forecast
8%
6%
8%
4%
6%
2% point gap to fill…
2%
0%
4%
-2%
2%
-4%
0%
2009
2012
2015
2018
2021
2024
2027
2030
60/40 Historic Returns & LTCMA Forecast
60/40
60-40 Historic Average (post-GFC)
60/40 (LTCMA)
-6%
U.S. Equity Euro Area Emerging Japanese UK Equity
Equity
Market
Equity
Equity
Cyclical Return
Source: Bloomberg, Datastream, Haver, J.P. Morgan Asset Management; data as of October 2021. 60/40 portfolios are composite of 60% AC World Equity and 40% U.S. Aggregate Bonds, in USD terms.
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Equilibrium Return
ACWI
FX
U.S. High U.S. 10U.S.
USD 60/40
Yield
Year Bond Aggregate
Bonds
2022 LTCMA Estimate, USD
What do we do about the 40% in our 60/40?
Real yields have trended downward over the last quarter century
8%
7%
6%
5%
4%
3%
2%
1%
0%
-1%
-2%
-3%
-4%
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
Real Yields Over The Past 25 Years
U.S. 10-Year
U.S. BBB Corporates
France 10-Year*
European BBB Corporates
Source: Barclays, BLS, Datastream, Bloomberg, J.P. Morgan Asset Management; estimates as of September 30, 2021, and September 30, 2020. U.S. and France 10-Year yields are yield to maturity; BBBs are yield to worst. Note: * France 10-yr used in LTCMAs as proxy for eurozone sovereign yield
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Where to find income?
Real estate
EM Local Ccy Debt
5,90%
EM Sov. Debt
5,20%
EM Corp. Bonds
4,80%
Euro HY
4,20%
U.S. HY
3,90%
U.S. core RE spread vs. BBB remains wide
60
50
40
30
20
10
0
0
50
100 150 200 250
# of times (‘04 – ‘21)
Extended fixed income
U.S. IG (2.80%)
-50
Equity dividends
0
50
100
150
200
Current
300
350
400
450
500
550
250
300
350
400
450
500
Infrastructure
Dividends as % of total portfolio income
15%
70%
10%
Annualized income
Annualized capital return
Global
50%
5%
U.S.
30%
0%
10%
-5%
'96
'00
'04
'08
'12
'16
'20
'09
'10
'11
'12
'13
'14
'15
'16
'17
'18
'19
'20
'21
Source: (Top Left) J.P. Morgan Asset Management; estimates as of September 30, 2021. (Top Right) J.P. Morgan Asset Management; data as of June 30, 2021. Spread data is quarterly from 1Q-2004 to 2Q-2021. (Bottom Left) J.P. Morgan Multi-Asset Solutions; data as of June
30, 2021. (Bottom Right) MSCI, J.P. Morgan Asset Management; quarterly data as of June 30, 2021. (Bottom Left) Source: Bloomberg, Datastream, JPMAM. August 2021. Based on MSCI ACWI /S&P 500 dividend yield and yield to maturity of Global Aggregate / US Aggregate.
Portfolios are 60/40. Note: Ccy = Currency, Sov. = Sovereign, HY = High Yield.
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Full spectrum investing: what levers can we use to enhance returns?
Alpha opportunities turning
14%
12%
10%
International diversification
Alternative investments
2022 LTCMAs (USD)
Equity long bias
Event-driven
Relative value
Macro
2022 LTCMAs (USD)
9%
8%
7%
8%
6%
6%
5%
4%
4%
Private Equity
8,2%
7,1%
6,9%
U.S.
Mid Cap
6,7%
4,1%
2%
0%
+3.80%
4.30%
5,0%
3%
2%
8.10%
Direct
Lending
U.S.
High Yield
6.90%
+3.00%
3.90%
1%
-2%
0%
-4%
'03 '05 '07 '09 '11 '13 '15 '17 '19 '21
Hedge Fund Alpha
China Europe EM
Dom.
Local
FX
Japan
UK
U.S.
USD Return
Source: (Left) J.P. Morgan Asset Management; data as of September 30, 2021. For illustrative purposes only. J.P. Morgan Asset & Wealth Management; estimates as of September 30, 2021.
Note: Dom. = Domestic, LC = Large Cap, RE = Real Estate, IG = Investment Grade.
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U.S.
Core RE
U.S.
Corp. IG
5.80%
+3.00%
2.80%
For the near term, we continue to prefer a pro-risk tilt
Policy and non-price sensitive demand is anchoring yields
Nominal government investment across key regions
S&P 500 EPS growth with breakdown
3,5%
100%
3,0%
80%
2,5%
2,0%
60%
1,5%
40%
1,0%
20%
0,5%
0%
0,0%
-0,5%
-20%
-1,0%
-40%
-1,5%
2013
Q1
2014
2015
U.S. 10-Year Real Rates
2016
2017
2018
U.S. 10-Year Breakevens
2019
2020
2021
Q2
Q3
Q4
2020
Q1
Q2
Q3
Q4
Q1
Q2
2021
Q3
Q4
2022
U.S. 10-Year Yields
Revenue
Margins Change
Net Income
Earnings per share
Buybacks
Source: Our World in Data, IIF, OECD, IMF, J.P. Morgan Asset Management. . Values are GDP weighted. Short-term interest rates are the rates at which short-term borrowings are affected between financial institutions or the rate at which short-term government paper is issued or traded in the market. *2021
growth rate figures are shown relative to 2019. Data are as of October 31, 2021.
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Longer term, investors may not be well positioned for beta or alpha
Asset mix for selected investor types
LTCMA 2022 selected returns
100%
Cash
1,3%
U.S. Agg
90%
80%
2,6%
Hedge Funds
70%
3,6%
60%
U.S. HY
3,9%
U.S. Equity
50%
40%
4,1%
Real Estate
30%
5,8%
20%
Int'l Equity
6,5%
Pvte Equity
10%
0%
8,1%
E&F >1Bn
0%
2%
4%
6%
8%
10%
Pvte Equity
E&F <1Bn
Int'l Equity
US Corp Pens US Public Pens
Real Estate
U.S. Equity
U.S. HY
Global Pens
Hedge Funds
Typical 401k
U.S. Agg
Cash
Source: Bloomberg, EBRI, WillisTowersWatson, NACUBO, Morningstar J.P. Morgan Asset Management; data as of October 2021.
Notes: Global pensions represents global 1000 corporate pension plans, 401k is consolidated allocations across age groups, Portfolio insights is average asset allocation for all moderate portfolios tested in Portfolio Insights
tool in October, some datasets mapped back to LTCMA asset classes by assuming allocation within aggregates based on market cap weight
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Takeaways
1.
A constructive view: Respectable long-term growth; expect growth above trend in 2022
2.
Inflation elevated but set to decline: Inflation should settle a little higher this cycle than last
3.
Bonds struggle: Even without yields rising sharply, a world of negative real rates is a challenge
4.
Opportunities in equities: Further upside to earnings in 2022, a better alpha environment ahead
5.
Alts the sweet-spot: Solid returns across alternative assets, but get comfortable with the tradeoffs
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DISCLAIMERS
NOT FOR RETAIL DISTRIBUTION: This communication has been prepared exclusively for institutional/wholesale/professional clients and qualified investors only as defined by local laws and regulations. JPMAM Long-Term
Capital Market Assumptions: Given the complex risk-reward trade-offs involved, we advise clients to rely on judgment as well as quantitative optimization approaches in setting strategic allocations. Please note that all
information shown is based on qualitative analysis. Exclusive reliance on the above is not advised. This information is not intended as a recommendation to invest in any particular asset class or strategy or as a promise of
future performance. Note that these asset class and strategy assumptions are passive only – they do not consider the impact of active management. References to future returns are not promises or even estimates of actual
returns a client portfolio may achieve. Assumptions, opinions and estimates are provided for illustrative purposes only. They should not be relied upon as recommendations to buy or sell securities. Forecasts of financial
market trends that are based on current market conditions constitute our judgment and are subject to change without notice. W e believe the information provided here is reliable, but do not warrant its accuracy or
completeness. This material has been prepared for information purposes only and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. The outputs of the assumptions are provided for
illustration/discussion purposes only and are subject to significant limitations. “Expected” or “alpha” return estimates are subject to uncertainty and error. For example, changes in the historical data from which it is estimated
will result in different implications for asset class returns. Expected returns for each asset class are conditional on an economic scenario; actual returns in the event the scenario comes to pass could be higher or lower, as they
have been in the past, so an investor should not expect to achieve returns similar to the outputs shown herein. References to future returns for either asset allocation strategies or asset classes are not promises of actual
returns a client portfolio may achieve. Because of the inherent limitations of all models, potential investors should not rely exclusively on the model when making a decision. The model cannot account for the impact that
economic, market, and other factors may have on the implementation and ongoing management of an actual investment portfolio. Unlike actual portfolio outcomes, the model outcomes do not reflect actual trading, liquidity
constraints, fees, expenses, taxes and other factors that This disclaimer should be added at the back of any LTCMA-only materials whose intended use on Nexus is Institutional/Financial Professionals.
could impact the future returns. The model assumptions are passive only – they do not consider the impact of active management. A manager’s ability to achieve similar outcomes is subject to risk factors over which the
manager may have no or limited control. The views contained herein are not to be taken as advice or a recommendation to buy or sell any investment in any jurisdiction, nor is it a commitment from J.P. Morgan Asset
Management or any of its subsidiaries to participate in any of the transactions mentioned herein. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on
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