In its annual Long Term Capital Market Assumptions report, the US asset manager lowered annual return expectations for a 60/40 multi-asset portfolio to its lowest ever: 5.5% for US investors, and slightly lower for European investors.
The return forecast is down slightly from last year, even though global growth has picked up since.
“The lower expected returns across the board are completely due to us being one year closer to the end of a bull market,” said John Bilton, global head of multi-asset at JP Morgan AM, presenting the company’s report to the press.
Over the past 12 months, the returns from high-yield bonds and equities (see chart) have far exceeded the long-term returns forecast by JP Morgan last year, even when calculated in euro terms, meaning they have basically been borrowed from the future.
Will tech boost productivity?
Next to the uptick in global GDP growth, Bilton identifies “secular developments in technology” as the main upside risk to the long-term return outlook.
Though technological innovation has failed to lift productivity in recent years, Bilton thinks this is bound to change as technology is fast becoming the core of the modern global economy.
“For the economy, technology is now what industrials were before [the rise of tech],” he said.
“Workforce automation and artificial intelligence have the potential to deliver significant overall productivity gains, and some nations facing growth challenges from aging populations [such as Japan, Italy and Germany] could see an additional boost to trend growth rates,” Bilton added. “This suggests a possible increase to our current Long-Term Capital Market Assumptions estimate of trend GDP growth in developed economies of 1% to 1.5%.”
The latter development (automation offsetting a shrinking workforce) may well be the greatest benefit technology could bring. After all, the growth of the labour force has historically been the best predictor of GDP growth, while the relationship between technological innovation as such and productivity growth is at best unclear, as JP Morgan AM’s graph above inadvertently shows.
Fund selection matters
The rise of passive investments may look as unstoppable as the tech revolution, but the technology revolution will have winners and losers, said Bilton. And that makes it all the more important to find the right investments.
“Manager selection will become increasingly important,” he said, illustrating his point by referring to the low-beta asset class par excellence: absolute return funds. Overall, these funds deliver poor risk-adjusted returns, he said. “But it makes a big difference whether you invest in the best or in the worst-performing absolute return funds.”