Volatile markets can be distracting. The latest statistical data release, report on China or reading of the Federal Reserve tea leaves can cause the markets to fluctuate — and send institutional investors scurrying for cover or hunting to seize perceived opportunities. Staying on top of current market developments is important. But having a long-term, cohesive view of the critical secular global economic trends and their implications for asset valuations is essential for reaching ultimate investment objectives. Basing a portfolio’s strategic asset allocation on a realistic and comprehensive 10- to 15-year perspective of what markets are likely to deliver can help investors build resilient portfolios and remain focused on their long-term goals.
J.P. Morgan Asset Management’s Long-Term Capital Market Assumptions research this year suggests an economic environment characterized by steady inflation, with, by historical standards, subdued global growth and a sustained dynamic of regional divergence. The adverse impact of an aging population will temper long-term growth in developed markets, and, in the short term, the monetary policy in each region has to reflect cyclical starting points that vary more widely than at any other point in time over the past 20 years. Across emerging markets, more modest commodity prices and the need for financial deleveraging will dampen economic expansion in the short term, though prospects for growth in the long term remain well ahead of those in developed markets.
• Traditional market returns over the next 10 to 15 years will remain generally below their historical long-term averages. Investors will have to ensure that they have the right balance between savings and contributions on one side and what, given realistic return expectations, the markets are likely to do for them on the other.
• An examination of our risk-and-return estimates across asset classes for 2016 versus 2015 suggests that investors willing and able to step out along the risk curve can expect to be somewhat better compensated than before for taking on that incremental risk, particularly when considering investments outside the U.S.
• Credit markets and high-yield bonds in particular appear relatively attractive, the latter offering close to equitylike returns with superior risk characteristics. Ongoing demand for yield and a long but shallow economic cycle with less leverage buildup should provide support. Additionally, the entrance of larger, more established issuers, although increasing issuer risk concentration, has improved average credit quality and issue size, as well as market liquidity.
With divergent growth and differing monetary policy patterns across the globe, investors need to ensure that they are sufficiently diversified not only by asset class but also by region. Investors can use this flexibility to enhance returns in a generally modest return environment.
Michael Feser is managing director and portfolio manager, multiasset solutions, at J.P. Morgan Asset Management in New York.
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