JPMorgan Asset Management Sees 'Buoyant' Economy, Growing AI Benefits

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Bloomberg Oct 23, 2024 09:17 · 52.1k Views

In JPMorgan Asset Management‘s 2025 report, it says "as investment levels pick up and rates normalize, a healthy – even buoyant – economy will emerge, providing a strong foundation for asset markets".

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Transcript

  • 00:00 So I think I talked to you this time last year about this the 28th one.
  • 00:03 Let's talk about the 29th version of this.
  • 00:05 What's changed?
  • 00:06 Well, I mean if we took just the raw moves we've seen in markets this year, I mean
  • 00:11 over 20% rally in the S&P, you'd expect the outlook would be a lot more doer
  • 00:14 will have taken a lot of the returns from the future.
  • 00:16 That's Scottish for bad by the way, that's Scottish for bad.
  • 00:18 It is, that's but
  • 00:19 the point being that if we actually look today, we still see a pretty optimistic outlook because we've gone through the fine tooth comb.
  • 00:25 We've looked at where investments happening from governments.
  • 00:27 We look at spending patterns, we look at
  • 00:29 AI and technology, which is just beginning to embed in the
  • 00:32 supply side of the economy.
  • 00:34 And actually that pushes up the earnings base and the growth base
  • 00:37 to a level that's for the G7, the highest level in nominal growth terms that we've forecasted
  • 00:42 now since the since 2020.
  • 00:43 So 5th up,
  • 00:45 5th annual upgrade running
  • 00:47 to our growth expectations.
  • 00:49 And certainly seeing the way growth is getting delivered around the globe and especially in the US, that gives us confidence that there's still growth into these valuations that we've seen expand in this year, in the last year.
  • 00:59 The noise has been epic.
  • 01:01 Is it how the swings have been absolutely gargantuan?
  • 01:04 How can you see the kind of the signal in that noise?
  • 01:07 Well, I mean, this is just the very point.
  • 01:09 We've got a market which is trying to calibrate to a new economic era.
  • 01:13 You know, we've gone past that new normal phase, that ultra low interest rate phase where really central bank activity goosed up asset markets to one where we're actually seeing more investment in future productivity, both from fiscal spending from governments talked about in the US talked about here.
  • 01:28 Even across the euro zone with the next Gen.
  • 01:30 fund, we're seeing more normal interest rates.
  • 01:32 We're seeing real interest rates that we expect to be positive and that's beginning to build sort of growth rather than simply inflating asset prices.
  • 01:39 So actually having a focus on that
  • 01:41 as the market is trying to calibrate that shift from the old to this new world we think is really, really important to do.
  • 01:48 In terms of what that is going to mean,
  • 01:51 is it going to mean higher interest rates?
  • 01:52 Because
  • 01:53 invest, there's another way of looking investment, which is deficits.
  • 01:56 Yeah, okay.
  • 01:56 Bigger deficits.
  • 01:57 Generally the bond market doesn't like bigger deficits.
  • 01:59 Generally the bond market prices higher yields, particularly at the kind of the longer end
  • 02:03 down the curve.
  • 02:04 Is that the kind of the scenario we're looking at here?
  • 02:06 Yes, we're going to be investing, but the cost of that is going to be
  • 02:09 a higher cost of money.
  • 02:10 Well, you can try and come at the debt to GDP equation in one of two ways.
  • 02:13 You can either try and shrink the numerator or you can grow the denominator.
  • 02:17 We spent a decade trying to shrink the numerator and it didn't end well.
  • 02:20 No, you know, all we ended up with was rates below 0.
  • 02:23 Real interest rates in the US at -1 1/2 percent throughout the period from the financial crisis to the pandemic.
  • 02:29 We're projecting around a positive rate of around 70 to 80 basis points going forward in in real fed funds.
  • 02:36 And that's more of a normalization.
  • 02:38 And we're expecting that.
  • 02:38 That's justified because the economy is stronger as we're seeing more fiscal involvement.
  • 02:43 We're seeing less need for central banks to do all the heavy lifting.
  • 02:46 And that's a healthier outlook.
  • 02:48 Typically healthy economies should have neutral or positive interest rates, not deeply negative ones as we saw in the last decade or so.
  • 02:55 What am I going to get out of my 6040?
  • 02:57 And is it going to be more than I'm getting out of my money market account?
  • 02:59 Oh yes.
  • 03:00 Oh yes.
  • 03:00 Well, make no mistake about that.
  • 03:02 We're expecting out of
  • 03:03 cash
  • 03:04 U.S.
  • 03:04 dollar terms, 3.1 percent on average for the next decade sounds pretty good, but it's a long way down from the 5% today.
  • 03:11 A lot of reinvestment risk.
  • 03:12 6040,
  • 03:13 we think we get about 6.4% with a sharp ratio of about point 3.31.
  • 03:18 So for investing actually, although it's come down from where it was a couple of years ago after we'd seen the sell off in 2022,
  • 03:26 we're still looking at something which is smack bang in line with the last 25 years average from a
  • 03:30 global stock bond 6040 in dollar terms.
  • 03:34 If I want to use that, how do I do it?
  • 03:35 It's all about the alternatives markets.
  • 03:38 2 years ago, we saw that big reset in bond markets and stock markets.
  • 03:41 It was painful.
  • 03:42 Past couple of years, we've seen real assets remarked in private markets, real estate, et cetera.
  • 03:48 If you add in
  • 03:49 an exposure to private equity, infrastructure,
  • 03:53 real estate and transportation, you take about 30% of your 6040 and allocate it across there.
  • 03:59 You can push up that sharp ratio by a third to about .43 and you can boost your returns by about 80 basis points.
  • 04:05 And remember, our numbers are just for median manager.
  • 04:08 That's before you started to
  • 04:09 layer in manager selection alpha
  • 04:12 over at Goldman Sachs, David Costa is pretty convinced that the S&P is done.
  • 04:15 You're going to get a little bit of a boost now
  • 04:17 maybe to the back end of this year, but then over the next 10 years you're not going to get very much out of the S&P.
  • 04:22 It's basically priced in all of what you talked about already
  • 04:25 and the asset price inflation is already in the market effectively is what he's signalling.
  • 04:29 You want to take the other side of that trade?
  • 04:30 We certainly do.
  • 04:31 I mean David's a great guy.
  • 04:33 We love the work that they do.
  • 04:34 But
  • 04:34 at the end of the day, we see more positivity,
  • 04:37 you know, the expectation that the US economy is not going to be the global
  • 04:41 globes dominant economy.
  • 04:42 And
  • 04:42 then we're not going to see the S&P 500, which has,
  • 04:45 you know, huge innovation,
  • 04:47 very strong revenue capture, you know,
  • 04:49 and a very, very dynamic capital market behind it and is designed for a digital economy, which is what's emerging today.
  • 04:56 How that doesn't capture the lions share of returns?
  • 05:00 Yeah, we struggle to see, yes,
  • 05:01 you don't have the valuation support that markets like Europe,
  • 05:05 UK, Japan have today, but you certainly have huge reinvestment and huge,
  • 05:11 huge upside in terms of
  • 05:13 returns.
  • 05:13 So we see about 6.7% expected return from S&P 500
  • 05:18 over the next decade or so.
  • 05:19 And we think that actually when we look at that in volatility adjusted terms, it's still very much the
  • 05:23 core portfolio.
  • 05:24 In two weeks time, we got an election in the United States.
  • 05:27 It's going to have a big impact over a significant chunk of your forecasting window
  • 05:32 next four years.
  • 05:34 How kind of how big an impact could this election have on what you see in terms of what the outcome is going to look halfway through the 10 year kind of window you're looking at?
  • 05:43 Well, you know, when I think about it over a long term, we've got 3 elections
  • 05:48 that are going to be pretty
  • 05:49 significant over our forecast horizon, which is 10 to 15 years.
  • 05:52 But yes, of course, this one's going to be very important as they always are.
  • 05:55 But the thing I would
  • 05:56 also know is if I look at cash returns versus a 6040 following any geopolitical shock over the last 35 years,
  • 06:04 over one year horizon, 6040 beats cash
  • 06:08 by our average of eight percent 3/4 of the time.
  • 06:11 The time
  • 06:11 over three years, it beats it by an average of 19 percent, 100% of the time.
  • 06:17 So we've seen this movie before.
  • 06:19 Geopolitics is a fact of life and we have to work through it.
  • 06:22 But ultimately we're looking at a strong economy in the USA
  • 06:26 catch up play that we can see taking place in terms of government spending, strong
  • 06:30 strong private sector spending and we think a much improved supply side to the global economy over the decade ahead.