J.P. Morgan Offers Sober Outlook Despite Market Highs

J.P. Morgan Asset Management has published its updated global market growth assumptions for 2018, offering up a forecast that is broadly unchanged from 2017 estimates.

The 2018 outlook analysis was penned by Anne Lester, head of U.S. retirement solutions for global asset management solutions, and Dan Oldroyd, portfolio manager and head of target-date strategies. The pair pins forward-looking annual developed market growth at 1.5% and emerging markets at 4.5%, translating to “constrained, generally modest return expectations across most major asset classes, further impacted by the late stage of the current business cycle.”

As Lester and Oldroyd have warned heading into prior years, many market participants are likely pleased with year-to-date results from their retirement accounts, but the outlook for market returns over the next 10 to 15 years “remains less than inspiring.”

“In an overall portfolio context, the expected return for a simple 60% world equity and 40% U.S. aggregate bond portfolio—in our view, a reasonable proxy for the average asset allocation over a typical participant’s life span—has declined to 5.25%, down from 5.50% last year,” Lester and Oldroyd note. “The stock-bond frontier has shifted in a clock-wise direction—as bonds improve, given an anticipated slow road to normalization, and elevated valuations, typical of the later stage of the business cycle, constrain equity returns.”

Both experts leave some room for ongoing short-term optimism, however: “Our analysis of the interplay between near-term cyclical factors and more enduring secular trends offers reason for cautious optimism. We see potential for technology-induced productivity improvements to help end a prolonged series of downgrades to trend growth. Nevertheless, investors can still expect to face a historically low return environment over the next decade.”

Offering some broad suggestions for retirement plan professionals, the J.P. Morgan analysis suggests individuals need to be given the ability to save more and start earlier.

“Our latest long-term economic growth and market return assumptions, combined with longer life expectancy, validate participants’ concerns about the possibility of outliving their retirement savings,” Lester and Oldroyd say. “Saving more is the most obvious and effective way to improve retirement outcomes.”

Making portfolio diversification easier—which in most cases means making it automatic—is the second suggestion from J.P. Morgan: “The goal, of course, is not simply to offer a broader range of investment options within the core menu; that would leave the complex task of asset allocation to plan participants. In fact, our research suggests that only about one-third of participants are confident in their ability to choose the right investment options from their plan lineups.…In our view, the best way to ensure participants realize the true advantages of diversification all along the road to retirement is through professionally managed portfolio strategies, such as target date funds (TDFs). Of course, that assumes the TDF itself is well-diversified, constructed by skilled asset allocation professionals who understand how participant behavior and investment needs vary over the life cycle and rely on a consistently derived set of long-term asset class return, risk and correlation estimates to inform portfolio construction and management.”

Finally, the analysis suggests retirement investors may want to consider using active management where appropriate.

“With a lower outlook for beta returns across most asset classes, alpha becomes an even more critical component for achieving required returns. Skilled professional investors can generate alpha through adept security selection and/or tactical asset allocation—opportunistically shifting assets across sectors, asset classes and regions as attractive opportunities present themselves,” Lester and Oldroyd conclude. “For example, insights into tangible investment opportunities associated with technological change and the ability to tactically position portfolios through the late-cycle challenges ahead present opportunities for alpha generation. And given the low correlation between the alpha and beta components of return, the active component can also help to diversify portfolio risk.”