Investors need to factor in tail risks

Investors need to learn how to handle headwinds as well as opportunities presented by the current economic environment, which is currently in its late cycle in the US, according to JP Morgan Asset Management’s (JPMAM) study “2019 Long-term capital market assumptions”.

The report, which looked at how 50 major assets classes around the world would perform over the next 10 to 15 years, found that despite of long-term optimism, the mature economic environment would require investors to evaluate how turning points in the cycle might lead to unexpected outcomes, even in diversified portfolios.

 According to JPMAM’s head of global multi-asset strategy, John Bilton, this would also require them to manage outside the mean.

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“In other words, investors will need to look for insight beyond traditional mean-variance tools to navigate the late cycle environment,” he said.

“In the longer term it implies that while reversion is a powerful force, it isn’t infallible and investors must be mindful of which of today’s dislocations may be tomorrow’s new equilibria.”

As far as global gross domestic product (GDP) was concerned, JPMAM expected the real global growth would stand at 2.5 per cent annualised on average for the next 10 to 15 years, an estimate largely unchanged from last year, despite a few adjustments at the country level.

The outlook for US equities would slightly fall but at the same time forecasts for emerging market equities would rise, widening the gap between developed and emerging equity return forecasts.

Following this, cash rates would be expected to rise further in this cycle but investors would see less upside risk to long-end yields, according to JPMAM.



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