Traders have had to deal with an important U.K. budget, U.S. PCE inflation data, a Bank of Japan policy meeting, a closely fought U.S. election, and a Federal Reserve policy decision all in just 12 days. Not to mention the Japanese election that marked the end of an era.
So, it makes sense that there is a good chance of instability in the short term. Equity buyers, on the other hand, don’t seem to care much. The S&P 500 SPX -1.56% is up 21.8% so far this year, just a little short of its all-time high. The CBOE VIX index VIX 13.32%, which shows how volatile the stock market is likely to be, is currently around 20 and only slightly above its long-term average of 19.5.
Still, there are a lot of big things that could happen, so it might be time to stop and think about the bigger picture. A lot longer.
The 29th version of JPMorgan Private Bank’s long-term capital market assumptions was just released. According to global investment strategist Alan Wynne, these assumptions are the opposite of the “short-termism of modern finance.”
The assumptions give estimates of the risk and return for more than 200 assets and strategies in 19 base currencies. As the name suggests, these assumptions are for the long term (10–15 years), which is important. They should help investors make smart decisions about how to allocate their portfolios, says Wynne.
The background is generally positive. The pandemic seems to have caused inflation, which is now going down because most big central banks are lowering the cost of borrowing money. Wynne says that the “misery index,” which is the difference between the yearly rate of unemployment (4.1%) and the increase in consumer prices (2.4%), is now 6.5%, which is lower than it has been 85% of the time in the last 50 years. So, that should make families happy, right?
Wynne says, “Lower inflation and stronger economic growth make for a good investment environment that opens up opportunities across all asset classes.”
For stocks, he says that the nearly 20% rise in global markets so far this year means that future gains will have to start from higher prices, especially in the tech sector. This makes people less optimistic about returns. This idea fits with what David Kostin of Goldman Sachs and other people have said recently, which is that the market’s great rise in recent years means it could have ten years of much lower returns.
Due to stronger economies, especially in the U.S., credit spreads have become narrower, which makes corporate fixed-income assets more appealing. Credit spreads are the yields investors get for buying bonds that are thought to be riskier than benchmark Treasurys.
The higher cost of capital, recent fund vintages’ high purchase price multiples, historically high amounts of uncalled-yet-committed investment capital (dry powder), and a difficult exit environment are some of the problems that Wynne says private equity faces.
But Wynne seems most optimistic about the real estate market for the long run. “High interest rates and tough debt markets have made commercial real estate less valuable,” he says. “We think that the recent big drop in prices has created a once-in-a-generation chance for long-term real estate investors.”
That shift boost return expectations for core assets in the United States, Europe and the United Kingdom due to higher entry yields, Wynne reckons.
“Our 2025 long-term return assumption for U.S. core real estate surges to 8.1% from last year’s 7.5%. Importantly, real estate is not a monolith, and our value-add return assumption climbs to 10.1% from 9.7%,” he says.
