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A cathartic moment after turmoil of 2022

The chaos of 2022 has reset valuations to the point where they’re hard to ignore, according to J.P. Morgan Asset Management. That doesn’t mean the future of markets is any less cloudy.

As the rollercoaster ride of 2022 draws to a close, the time of the investment outlook is upon us. And while “low single digit returns” has been the mantra of many a forecaster struggling to divine Jerome Powell’s rate path or the possibilities of nuclear war in Ukraine, J.P. Morgan Asset Management (JPMAM) is more optimistic: everything has come off so much that it now offers a near-perfect entry point, while the policy dislocations that caused everything to come off will soon be unwound.

“Lower valuations and higher yields mean that asset markets today offer the best long-term returns in more than a decade,” JPMAM (headed up by George Gatch, photo at top) wrote in its latest Long-Term Capital Market Assumptions report. “It took a painful slump in stock and bond markets to get here, the worst of which may not yet be over.”

“Still, the turmoil of 2022 might be considered a cathartic moment, revitalising the portfolio toolkit and creating attractive investment opportunities in the years ahead. In the near term, investors face a challenging time, as a recession or at least several quarters of subtrend growth lie immediately ahead. Nevertheless, our assessment of long-term trend growth is only marginally below last year’s. We expect today’s inflationary surge to eventually subside to a rate only slightly above our previous estimates.”

Last year, JPMAM was in the low single digit camp; this year, it’s lifted its forecast for US dollar denominated 60/40 portfolios to 7.2 per cent, and believes that the core principles of investing still hold firm – that 60/40 will once again form the bedrock of portfolios, while inflation and policy risk, as well as increased return dispersion across assets, “will give active managers more to swing for”.
Alternatives have “renewed appeal” as sources of alpha, inflation protection and diversification, while bonds are “no longer serial losers”.

“Bonds are offering income again and, we believe, will again be a good hedge, regaining their safe-haven status in times of market stress,” the report says. “Historically, the correlation between risk assets and bonds has turned positive during periods of very high inflation. Our base case is for inflation to be lower and more stable, and hence for this correlation to return to more normal levels over time.”

And a forecast wouldn’t be complete without themes for the years ahead. Anxiety over deglobalisation has dominated markets since the economic protectionism of the Trump years and the grievous impact of Covid on supply chains, but JPMAM believes that globalisation will “evolve but not unravel”.

“Winners and losers will emerge across regions and industries as a fragmented global economy will reach a new trade equilibrium in the long term, one that allows for some restored efficiencies and inflation falling back to central bank targets,” said Tai Hui, JPMAM APAC chief market strategist.

JPMAM’s most likely scenario for the future of globalisation is a “multi-polar world” where trade blocs become more politically aligned, driven by nationalistic economic policies. The global economy could become less efficient; trade intensity in goods will decline, while services will flourish among “growing digitalisation”.

“One potential structure could have the U.S. and Western Europe in one bloc and China and Russia in another,” the report says. “Meanwhile, other countries and regions, such as emerging economies in Southeast Asia, Latin America and the Middle East, opportunistically trade with both sides.”
“… Countries won’t stop trading, but what they trade may shift. We could also see that innovation and cooperation to solve global problems, such as climate change, may bind nations together in a multi-polar world.”

Still, there are two other possibilities occupying the minds of JPMAM’s forecasters: a world where globalisation is renewed, with international organisations once more taking the lead in global collaboration on trade and regulation, and trade barriers continuing to fall; or “full fragmentation”.

“Under this scenario, globalization unwinds as nations emphasize domestic production of goods and services and increase the use of tariffs and other barriers to trade, even among countries that are politically aligned,” the report says. “Immigration is generally discouraged. This would imply both higher costs and lower efficiency, and by reducing economic relationships among nations, fragmentation could lead to greater international conflict.”

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