A global fund manager’s market assessment has predicted fixed income investments will continue to generate poor returns over the coming 10 to 15 years.
JP Morgan Asset Management has reached this conclusion as a result of its “Long-Term Capital Market Assumptions” analysis, which forced it to lower its global economic growth expectation over the period to 2.3 per cent, down 20 basis points from previous forecasts for the same period, while also concluding inflation during this time frame will remain at around 2.2 per cent.
“Where that gets you is to a pretty bleak place for fixed income and bond returns. Bond yields and interest rates are low around the world. We do assume there will be some recovery at some point to higher interest rate and bond yield levels, but it will take longer, so we lengthened [the expected] time it’s going to take there and we’ve cut again a little bit the interest rate levels we assume in the long run,” JP Morgan Asset Management multi-asset solutions global strategist Patrik Schowitz said.
“All of that together just hits your return from fixed income.”
Schowitz said this outlook has a number of implications for investors.
“The first one is that in relative terms risky assets look better again. Not because they look good, it’s just because safe assets look so bad,” he noted.
To this end, the manager is anticipating returns generated from equities to be about 5.5 per cent to 6 per cent around the world.
The second implication Schowitz highlighted was the need for investors to revisit the make-up of their portfolios to move away from traditional allocations to fixed income investments.
“If you’re at these low starting yields, bonds aren’t paying you, so that safe part of your portfolio that is meant to protect you [will be less effective],” he said.
“You used to have it good every way in a sense that [fixed income allocations] were giving you safety, was giving you negative correlation to risk, and you were actually being paid to hold it and as global bond yields were falling, you actually had that gain from duration.”
He pointed out unfortunately there were not many safe haven assets investors could look to as a substitute for bonds and perhaps allocating funds to income-generating investments in the alternative space was a potential solution.