The American exceptionalism will finally make way for outperformance of European and EM equities, according to JP Morgan AM’s annual long-term capital market assumptions.
‘The American exceptionalism of recent years has been dominated by technology stocks’, noted Global Market Strategist Vincent Juvyns (photo). ‘We are more optimistic for Europe than for the US. In fact, we are seeing a change in leadership. In Europe, we see more fiscal stimulus and more focus on green innovation. And the same applies to certain emerging countries. China, for example, is very well placed. After all, it is a major producer of renewable technologies. 70% of lithium batteries are produced there. These markets are now going to challenge the US. Hence our optimism.
A focus on green investments is important, Juvyns stressed, as we can expect a high carbon price in the future. ‘A low-carbon economy will enable sustainable growth, and therefore increase returns. Europe is at the forefront of climate challenges, and this will increase investment opportunities.’
Juvyns is also positive for the UK’s return expectations: ‘We expect a return of 6.10% in euros for next year.’ Moreover, a weaker dollar can encourage US investors to invest outside their own country, Juvyns added.
Alpha boost
Sorca Kelly-Scholte, Head of EMEA Pensions Solutions & Advisory, said that alternative asset classes could boost alpha. ‘We expect private equity to generate significant additional returns compared to listed equities. Alternative investments can also yield more stable income streams and offer more diversification. These can be found, for example, in hedge funds, real assets and core alternative credit. Manager selection remains extremely important in both private equity and hedge funds. We have good return expectations for US real estate, Asia-Pacific real estate, and global infrastructure.’
Thushka Maharaj, Global Multi-Asset Strategist, noted that fiscal and monetary policies are converging. ‘We believe that this will provide greater support for growth in the years to come. It does not immediately change our trend growth expectations, but this policy could have a greater impact on inflation. So in the long term we do see modest tail risks to higher inflation. Not in the short term, but over a period of ten to fifteen years.’
Asset class for all seasons
According to Maharaj, the role of government bonds in a diversified portfolio will change. ‘We are evolving from protection plus income to protection only. So the income component will disappear. In the coming years, we expect interest rates to remain low, but volatility will be contained by monetary policy. If the fiscal stimulus measures are successful, interest rates will eventually rise, which means losses for bond investors. However, even after normalisation, we expect interest rates to remain low. On the other hand, we do expect positive yields on corporate bonds. Nevertheless, active and selective management will become more important. Investment grade corporate bonds can gradually take over the role of government bonds because they still have a yield. So credit will basically evolve into an asset class for all seasons.’