The global economy has entered a new cycle that demands a new portfolio for the current decade beyond the usual 60/40 stock/bond mix, according to J.P. Morgan Asset Management’s latest Long-Term Capital Market Assumptions Report, its twenty-fifth.
The impetus to move beyond the 60/40 model is stronger now than last year, when JPAM first suggested an alternative, and stronger than after the Great Financial Crisis, according to the assumptions report. Bond yields are lower because of monetary policy and equity valuations are higher because of fiscal policy — setting the stage for lower returns in the future.
“The 60/40 portfolio, the stalwart for many, many years of American investing, has been cut down to the point where it has reached just a 4.2% expected return,” a weaker outlook that has accelerated during the coronavirus pandemic, said John Bilton, Head of Global Multi-Asset Strategy, Multi-Asset Solutions at JPAM, who spoke on a webinar about the report. “We need to recognize that a 60/40-only portfolio will really struggle in the current environment.”
“Finding long-term returns will be more difficult now than it was in the last decade,” said David Kelly, chief global strategist at JPAM, who also participated in the webinar.
The solution to this challenge, according to JPAM, includes more alternative investments such as real estate, private equity and hedge funds, to boost returns. “The use of alternatives — to provide income and diversification — is more imperative than ever,” according to the assumptions report. It cautions, however, that investors recognize the trade-offs between private and public markets, namely liquidity, and the importance of manager selection, although liquidity is expected to grow “robustly” along with investor access to those markets.
Private equity is expected to gain about 2% more than public equity while core real assets like real estate and infrastructure are seen delivering about twice the yield of global bond aggregate with 40% less volatility than global stocks, said Pulkit Sharma, Head of Alternatives Investment Strategy & Solutions.
Some other highlights of the JPAM outlook for this decade:
- Continued fiscal and monetary policy coordination especially in developed markets
- Modest global growth: 2.4% over next decade with emerging markets growing faster than developed markets: 3.9% vs. 1.6%
- No central bank interest rate hikes for years: close to 4 years for the U.S., beyond six years for Europe and more than eight years for Japan
- Better returns for global equities than U.S. equities because the latter are already elevated. Global equity returns excluding the U.S. are expected to grow 6.7% vs. 5.1% including the U.S.
- High-yield and investment-grade bonds returns comparable to returns from equities, with Sharpe ratios greater than that of equities.
- A weaker U.S. dollar
- More negative real returns for government bonds globally along with moderate inflation
- Inflation at 2.2% globally but 3.3% in emerging markets.
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