As markets and investors focus on inflation, monetary tightening and other current short-term headwinds, JP Morgan has taken a step back. In its “Principles of Long-Term Investing 2023” report, which outlines the risk and return outlook over the next 10 to 15 years, the bank believes that “capital markets offer the best long-term investment returns in more than a decade, due to lower valuations and higher yields”.
The annual return outlook for a 60/40 equity-bond portfolio--“the foundation of a portfolio”--has jumped, whether invested in dollars or euros. In dollars over the next 10 to 15 years, such a portfolio jumps from 4.3% last year to 7.2%. The same portfolio in euros sees its yield rise to 5.1%, “an increase of 230 basis points between 2022 and 2023”.
As for the bond market, JP Morgan's analysts are adamant that “bonds are back”. The forecast for Euro bonds is 3%, which is higher than the forecast for US large cap equities in euros last year (2.8%).
“The painful stock and bond market downturn in 2022 may not be over yet, but longer term, we see this year’s turbulence as creating the most attractive investment opportunities we have seen in a decade,” said John Bilton, head of global multi-asset strategy at JP Morgan Asset Management. “While markets remain challenging in the near term, for the first time in years investors have a full toolkit for their portfolios, with return expectations for assets across the risk spectrum once again positive.”
Perfect entry point
Less than the performance of companies per se, it is momentum that currently makes the difference.
“Despite the short-term cyclical challenges, our inflation forecasts are moving only modestly higher, as we see inflation slowing close to central bank targets,” said Vincent Juvyns, global market strategist at JP Morgan Asset Management.
Juvyns stated that, “if entry points are more attractive than they were a year ago, they could become even more attractive if the cyclical downturn in 2022 extends into 2023, as seems likely. Therefore, investors need to think about the timing of their entry point, taking into account how much ‘drawdown/rebate’ they can tolerate in the short term.”
"Stocks look 25% cheaper. The 2023 MSCI ACWI forecast (6.40% in euros) indicates that you could double your money in about half the time compared to our 2022 forecast.”
The increasingly popular and accessible assets for the retail investor should, in this context, add a valuable layer of alpha and diversification. “Adding 10% private equity and 10% real estate to a classic 60/40 portfolio can increase the Sharpe ratio--a ratio that measures the performance of an investment taking into account the risk taken--by 10%”.
Juvyns said: “Our study predicts that asset classes will return to their traditional roles in portfolios, with equities offering strong capital appreciation, bonds providing significant returns and alternative assets offering diversified exposure to unique income streams.”
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