Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.
I reference this image as it provides an investor with an important reminder...negative volatility subsides the longer one's time horizon (holding period) is:
At this interesting juncture, we are pleased to launch the 2024 edition of J.P. Morgan Asset Management’s Long-Term Capital Market Assumptions (LTCMAs). In our 28th year of producing capital market estimates, we incorporate more than 200 asset and strategy classes; our return assumptions are available in 17 base currencies.
Over the years, many investors and advisors have come to depend on our assumptions to inform their strategic asset allocation, build more resilient portfolios and establish reasonable expectations for risks and returns over a 10- to 15-year time frame. Additionally, with each passing year, we aim to readjust our long-run approximations, incorporating new information presented by markets, policymakers and economic data.
In this edition of our LTCMAs, our economic and asset class forecasts generally hold steady. While the 60/40 stock-bond portfolio remains at the core, it requires extension, expansion and enhancement. The insights presented here aim to help clients identify the right adaptations for their risk and return objectives as they build smarter portfolios for a world in transition.
Despite some well-flagged issues in some segments of U.S. commercial real estate and persistent weakness in China, we believe that the outlook for core real estate is strong. In the wider real assets complex, the return outlook remains resilient, with core transport forecasts rising 20bps to 7.7% and core infrastructure up 50bps to 6.8%. In addition to attractive returns, real assets offer a diversifying potential that is especially welcome, given the greater volatility in inflation that we anticipate over our forecast horizon.
On Cash LT:
While high cash rates appear compelling, investors should remember that sitting in Treasury bills might mean collecting 5% for limited risk today, but it misses out on compounding of returns over the longer run. In short, extending out of cash is imperative. We estimate that a dollar invested in cash will be worth, in real terms, USD 1.04 a decade from now, whereas in a simple public market 60/40 it would grow to USD 1.54, and in a 60/40 with 25% alts it would be worth over USD 1.60. So for investors that have already extended out of cash, the capacity to extend further within their asset opportunity set – factor allocation, international diversification, currency overlays, etc. – is not constrained by higher cash rates. Compared with last year, equity valuations are higher and translate to a modest cyclical headwind for stocks. By contrast, elevated starting yields are a cyclical tailwind for bonds.
Capital & Active Management:
when capital is provided by asset buyers with a financial stability objective, they buy indiscriminately, but when capital is provided by investors with a return objective, they buy selectively. More selective investment means more differentiated asset performance and greater potential for active styles of investing.
Industrials:
The tax incentives in the U.S. Inflation Reduction Act (IRA) support greener commercial buildings and more efficient air conditioning units, which will benefit U.S. electrical and air conditioning companies. Electricity providers will also benefit from reshoring supply chain policies, as electric grids need to be strengthened. More broadly, reshoring supply chains will stimulate the use of U.S.-made inputs across the U.S. industrial sector, potentially benefiting U.S. manufacturers relative to their competitors in Europe and China. In addition, reshoring should fuel global spending on factory automation to offset higher domestic production costs, a boon to global suppliers of factory-automation software. Finally, rising geopolitical tension is increasing global spending on combat readiness, a clear benefit to defense companies.
Utilities:
The U.S. Inflation Reduction Act (IRA) will benefits renewable...most of the largest renewables developers in the U.S. are European.
Semi-Conductors:
Over the near term, expanding chip manufacturing should benefit the tech companies that provide the required equipment, software and design that support chip production. However, chip tech equipment companies may face competition in the longer term as Chinese companies are incentivized to develop their own equipment.
Comments
Range of Stock, Bonds and Blended Returns
Fixed Income Return Projections
Outlook for Real Estate: On Cash LT: Capital & Active Management: Industrials: Utilities: Semi-Conductors: 2024 Long-Term Capital Market Assumptions
Asset Allocation Chart:
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