Expected investment returns are low by historical standards, with a 60% equity /40% fixed income portfolio projected to generate a return of 4.3%, suggesting that investors need to look beyond traditional asset markets to find higher returns, Patrik Schöwitz, global multi-asset strategist at JPMAM, told a media webinar this week.
Additionally, higher inflation numbers are eating into fixed income returns, and investors should broaden the tool kit for returns by looking into alternative assets and incorporating private investment as a part of the overall portfolios, he added.
“This year, we raised long-term inflation projections for the first time in many years. Despite high inflation and low return expectations in public markets, we see plentiful opportunities for investors who are willing to expand opportunity sets beyond publicly traded assets and core markets,” said Schöwitz.
The webinar introduced JPMAM’s 26th edition of its annual Long Term Capital Market Assumptions (LTCMA) report, which provides a 10-15-year outlook for risks and returns. The LTCMA report outlines the average annual returns investors can expect for around 200 major asset classes over the next decade.
The benefits of alternative assets – improving alpha trends, the ability to harvest risk premia from illiquidity, and the opportunity to select managers that can deliver returns well above what is available from pure market risk premia alone (beta) – will continue to attract capital over the coming decade, the authors concluded.
Diversify with China
JPMAM also recommended that investors add Chinese assets, particularly onshore assets, into their portfolios to boost returns in the coming years.
“Given the near-term economic slowdown and regulatory uncertainties, China represents more of an alpha story than a beta story. Despite the short-term volatility, the strategic investment case for Chinese assets remains strong,” Sylvia Sheng, global multi-asset strategist at JPMAM, told the webinar.
“Over the longer term, we expect China’s onshore equities and bonds to return a sizeable premium over core developed markets and become more mainstream in global portfolios, fueled by further capital market reforms and opening and attractive return and diversification opportunities,” she added.
On the return’s perspective, Sheng thinks one of the main factors, in addition to the stronger foreign investor flows, is rising domestic investor flows, which is partly driven by the rapidly expanding middle class putting more of their savings into financial products.
“We think that could be a key support for Chinese onshore assets returns. Although we think Chinese equities do have higher volatility, it’s likely to be offset by diversification benefits,” she said.
Given the low correlation between China’s onshore assets with some developed markets assets, there are plenty of opportunities can be explored, said Sheng.
JPMAM conducted a hypothetical analysis by looking at three different equity/fixed income portfolios: a conservative portfolio of 40/60, a balanced portfolio of 60/40, and an aggressive portfolio of 80/20, and then reallocated five to 10% of the global portfolio into Chinese onshore assets, including A-share and government bonds.
In each case, portfolios returns were improved without adding to volatility, according to Sheng.
JPMAM raised its assumptions for China A-share returns to 6.6% in local currency terms and 8.2% in US dollar terms, up from 6.3% and 7.5%, respectively, last year.
Meanwhile, it forecasts an unchanged 4.1% annual return for US large cap equities, raised its euro area equity forecast 60 basis points (bps) to 5.8%, and lowered its emerging markets estimate 20bps to 6.6%.
These changes combine to pull its estimate of global equity returns down 10bps, to 5% in US dollar terms.
