Volatility has risen across most asset classes this year as central banks in the US, Europe and the UK have started to withdraw the extraordinary measures to support financial markets that were introduced in response to the 2007-08 financial crisis.
The increase in volatility has clouded the near-term outlook but analysts at JPMorgan Asset Management have again looked into their crystal ball to assess the prospects for asset class returns in the next 10-15 years.
Long-term forecasts are fraught with difficulty but JPMAM's intention is to provide a framework that can help institutional investors, such as pension schemes, make asset allocation decisions.
Expectations for returns from US Treasuries, investment grade corporates and high-yield bonds have all improved as increases in US interest rates, already introduced by the Federal Reserve, have created a better starting pricing point for investors.
JPMAM expects long-dated Treasuries to deliver annualised returns of 3.25 per cent over the next decade, up from 2.5 per cent in last year’s analysis.
Expected risk-adjusted returns (Sharpe ratios) that take volatility into account for US Treasuries now “meaningfully exceed” those of US stocks for the first time in a decade, according to John Bilton, JPMAM’s head of global multi-asset strategy.
The S&P 500 (.SPX) has fallen by about 10 per cent since reaching an all-time high in late September as more investors question whether the US stock market will make further gains after its longest bull run in history.
US large-cap stocks, which make up the S&P 500 index, are projected to deliver long-term returns of 5.25 per cent, revised down from last year’s 5.5 per cent forecast.
JPMAM expects the best long-term returns to come from emerging market and Asia ex-Japan equities at 8.5 per cent and the poorest from a diversified basket of commodities at 2.25 per cent.
More investors are venturing into illiquid alternative asset classes in search of better performance. JPMAM expects private equity to deliver annualised returns of 8.25 per cent but is much more cautious on the outlook for hedge fund managers.
Diversified hedge funds are forecast to deliver annualised returns of 4.25 per cent, well below the expected performance of a low-cost US stock tracker, even before fees are taken into account.
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