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JP Morgan Asset Management’s latest long-term capital market assumptions

‘Despite some of the near-term noise we may see around tapering, we actually think that the environment continues to be very supportive’: MD John Bilton.

SIMON BROWN: I’m chatting now with John Bilton, head of global multi-asset strategy at JP Morgan Asset Management. John, I appreciate the time. You guys have just completed the 26th annual edition of the JP Morgan Asset Management Long-Term Capital Market Assumptions. Can you give us a short overview of what the research is designed to achieve, and what the key findings were looking ahead to 2022?

JOHN BILTON: Of course. And thanks for having me on this. Yes, you’re right, it’s our 26th annual edition – something that as an organisation we’re immensely proud of. We’ve titled this year’s Long-Term Capital Market Assumptions ‘Fading Scars, Enduring Policies’ – and that really captures the ethos of what we’ve been looking at.

If we go back two years, at the beginning of the coronavirus pandemic we were all concerned about long-term economic scarring damaging the potential growth rate of the economy, and we were expecting to see significant bankruptcies and layoffs that would really reduce productive capacity. That’s not the legacy of the pandemic. Instead, what we’ve seen is that the tools and the policies brought in – both fiscal and monetary – to prevent that outcome, are actually what the legacy of the pandemic is going to be.

We think that for the next 10 to 15 years we’re going to face a substantial period with significant policy support.

So the world we had previously – where we had just monetary policy pushing, we didn’t have significant capex or fiscal spending cycles, and we had something of a lop-sided economy is now behind us.

Going forward [presents] a little more inflation risk. We do face a situation where bond returns are likely to be negative in real terms for G4 sovereigns throughout much of our forecast horizon.

We see a lot of potential in terms of returns from equities, because we do think this is a decent growth environment, and of course we have to widen our opportunity set if we are to get towards being able to deliver the type of returns that we’ve seen historically.

SIMON BROWN: I take your point on that – the supportive accommodative policies, the responses that prevented that economic fall down. What do you expect from central bank tapering programmes and a potential impact on asset classes?

JOHN BILTON: Well the tapering obviously is a near-term issue with regard to where we are today. We do expect to see tapering across all of the major central banks in the next year or so because we have been operating with very accommodative policy. So think of this as normalisation rather than a tightening. But, make no mistake, we expect central-bank balance sheets to remain a significant force throughout the next 10 to 15 years. We’re not expecting to see a major shrinkage at any time.

So how do we actually think about it from asset markets today? Well, I think first and foremost, if we take the short term, the market has absorbed the idea of tapering without having the kind of taper tantrum that we saw back in 2013. So I think it has actually been relatively well telegraphed. It’s arguable that the central banks have learned from prior experiences and actually have run this a lot more smoothly; but it also indicates what we can expect from central banks.

We think that monetary policy and decisions are going to be telegraphed a lot more in advance. We think that balance sheets will matter at least as much as front-end rate policy. But remember, even if we see tapering we are going to still be in a world where interest rates – both short and long term – are likely to be below prevailing inflation rates. That means a world where real returns will be negative for bonds … of course, if you are a bond holder, it means that you’ve got to think very carefully about those fixed-income holdings.

But if you are holding another asset, whether it be equities or alternatives, your discounting rates actually support your forward cash flows. That’s the reason why, despite some of the near-term noise we may see around tapering, we actually think that the environment continues to be very supportive.

SIMON BROWN: You mentioned those economic scars created by the pandemic, and their not being as severe as forecasters had expected, [with] growth returning in developed markets. How would you describe the impact on emerging markets in the shorter and longer term, and particularly once the commodity cycle ends?

JOHN BILTON: I think that’s one of the things we’ve got to think about. Let’s bring it back to the commodity cycle: is the commodity cycle ending? We’ve obviously seen a very significant jump in terms of commodity industries over the past couple of years, as we’ve seen the goods market really pick up significantly with a lot of activity there.

But we do think from our numbers that commodities are going to continue to beat their benchmark, which is global inflation, which implies that there’s further upside, albeit less in terms of magnitude than we’ve seen in the past for commodities.

So they should be well supported. Also, it’s worth bearing in mind that, as we move towards a new green future, renewable and sustainable infrastructure doesn’t build itself; there will be near-term demand for commodities. So calling the halt to a commodity cycle might be a little bit premature.

How does that translate back to emerging markets? Well, the thing to remember is that emerging markets are a very different animal today than they were 10, 15 years ago. They are less commodity-dependent. Obviously there are pockets – South Africa of course being one of them [and] Brazil and so on. But, by and large, the emerging market in equity-market terms is dominated by places like China, India, Taiwan, Korea, and the index makeup in these places is much more developed market like big-tech sector increasing exposure to consumers.

So where do we stand on emerging markets? Well, emerging-market growth is still above developed-market growth because there’s more of a pickup back towards the technological frontier, we feel.

There is reason to expect EM to be growing more rapidly than DM, but the differential is lower than it was in the past.

The returns are potentially still there, but we have to recognise that the indices themselves are rather different today.

SIMON BROWN: I take your point. And then in your view, for a last question, to get strong real returns what does an optimal global diversified portfolio look like compared to that historic 60:40 equity:bond?

JOHN BILTON: Well, at the end of the day this is part of the issue. If you go back 10 years, if you look at the rolling 10-year return of global equities and US aggregate bonds, you were picking up 7% or 8%; we are simply not going to see that going forward.

To earn the same amount of return you have to do something different. There’s no two ways about it. You’re going to have to take more risk.

The thing that we would argue is that, because bond yields are so low, you’re not getting a return from your fixed-income component.

While it’s still important to have bonds in a portfolio, what you can’t do is rely on them to give you a reasonable return; so you’re putting a lot more risk on equities.

You’re also looking at using diversification – what other assets give you different moments of risk – whether it be illiquidity risk, international risk, and so forth – and building that in.

So, going forward, we can achieve reasonable returns, but we have to think number one about using illiquidity – real estate, real assets, private equity and so on, as well as your public markets.

We have to think, number two, about international (markets). Most investors around the globe have something of a home bias, but there’s a lot to play for if you look more widely across the globe.

Then, number three, I think we have to be a little more active because, remember, the returns we suggest – and at the moment we’re seeing a little over a 4% expected return on a US dollar 60:40 – those returns are just the baseline. That’s what you get if you buy the market but don’t take any active or cycle-aware decisions. So taking some of those active decisions is the final part that we think is important in being able to plan and manage to generate higher returns.

SIMON BROWN: We’ll leave it there. John Milton, head of global multi-asset strategy at JP Morgan Asset Management, I appreciate the time.

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