The post-global financial crisis world of low growth, low interest rates and low capital investment is fading in the rearview mirror. In its place is a healthier economy set to deliver higher growth, higher rates and strong capital investment. “Fiscal activism” (increased government investment) has overtaken the “monetary activism” (aggressive monetary policy) of the 2010s. Investors need to manage a range of risks, not least from the geopolitical tensions that dominate the headlines. But overall, we have a constructive outlook.
Against this backdrop, we are launching our 2025 long-term capital market assumptions. Presenting our annual capital market estimates for more than 200 assets and strategies in 19 base currencies, we examine how some of the structural factors affecting economies today are likely to drive asset returns over a 10- to 15-year investment horizon.
This year’s forecast explores how four key forces — strong private capex trends; fiscal activism; a tendency toward economic nationalism; and widespread technology adoption — notably of artificial intelligence — will shape the economy and markets in the decade ahead.
Higher growth, higher rates — and solid returns
Our macroeconomic outlook sets a strong foundation for long-term returns across public and private markets. We anticipate stronger growth and modestly lower inflation.
Higher growth means higher cycle-neutral cash rates which, in turn, support fixed-income returns. Our forecast for the U.S. cycle-neutral cash rate increases 30 basis points to 2.8% implying average cash returns of 3.1% over our forecast horizon.
Higher growth also supports corporate earnings and projected equity returns (only modestly lower despite valuations at challenging starting points). Our long-term return forecast, of 6.4% for a USD global 60/40 stock-bond portfolio, dips 60 basis points from last year, which is in line with the long-term average.
Our U.S. large-cap forecast falls just 30 basis points to 6.7%, even as valuations act as a 1.8% drag on returns over the investment horizon. We think the U.S. market’s high-quality characteristics and sector mix (including a powerful technology sector) justifies the valuation premium that U.S. stocks have compared to their peers over the next 10 to 15 years.
In private markets, alternatives are now emerging from a period of asset repricing and offer attractive returns and diversification options. Real assets in particular provide a compelling benefit: diversification against inflation shocks. In global real estate, we see a generational opportunity for long-term investors as a direct result of valuations significantly re-rating. Our U.S. core real estate return forecast rises from 7.5% to 8.1%.
Turning to financial alternatives, our private equity return forecasts increase slightly (to 9.9% for our composite). We believe a thawing of the IPO market after two very subdued years will be an important catalyst for future returns. Hedge fund median manager forecasts move slightly higher. We note that higher cash rates have a meaningful and positive correlation with hedge fund excess returns, implying a good environment for manager alpha.
On the FX front, we continue to expect that the U.S. dollar will depreciate over our forecast horizon— but perhaps at a more muted pace.
In building our forecasts, four themes emerge that affect our assessment of productivity, corporate earnings and inflation:
Strong private capex: The pandemic, the energy crisis and opportunities from new technologies such as AI have revitalized the desire to invest. We expect this pattern to continue, and potentially to accelerate over our forecast horizon. A trend that, in the short run, supports the investment side of the economy. While in the long run, investment tends to lead improvements in productivity — which, in turn, can be a moderating force on inflation.
Fiscal activism: Austerity is off the agenda as governments begin to ramp up their fiscal spending. But it matters how public funds are spent. To boost real growth and not merely fuel inflation will require investments that stimulate supply rather than purely stoke demand.
Spending on supply chain resilience and national defense, for example, requires a fine line between judicious investment and excesses that embed inflation. By contrast, investments in electrification, sustainable energy grids and incorporating AI and automation into the economy can potentially boost productive capacity in the long run.
To the extent that government spending proves wasteful, bonds may reclaim their role as the global economic police force. This may come at the price of higher volatility in government bond markets.
Economic nationalism: The pandemic highlighted the fragilities in supply chains and infrastructure, spurring a trend toward economic nationalism that so far stops well short of deglobalization. In our forecasts, the prospect of economic nationalism means our estimate of inflation volatility remains elevated. That in turn underscores the utility of assets with positive gearing to inflation, such as real assets and commodities.
Artificial intelligence: Adoption of AI has only just begun, and it will likely broaden out to affect all parts of the economy. We now project a 20 basis point annual boost to developed economies’ growth from AI — potentially a conservative estimate. We anticipate stronger capital growth related to AI investment spending, and improved productivity related to efficiency gains with AI technology. The trend is expected to support higher revenue growth and margins, especially for U.S. large-cap companies.
Implications for portfolio construction
A backdrop of higher growth and higher rates provides a relatively healthy and stable environment for most categories of risk assets. However, elevated inflation volatility is a concern.
From a portfolio construction standpoint, we see:
- Greater volatility in short-term stock-bond correlations, and a wider range in correlations over the forecast horizon.
- Higher nominal yields, allowing core bonds to effectively offset the impact of growth shocks on a broader portfolio and deliver a more meaningful level of total return and income over time.
- A key role for active management and alternative asset classes in mitigating inflation risks while boosting potential risk-adjusted returns across portfolios.
While long-term forecasts may provide investors more clarity about the ultimate destination, uncertainty about the starting point and the journey ahead leaves little room for an autopilot strategy. Thoughtful strategies can draw on a few powerful themes: Bonds can help with growth risks, alternatives can mitigate inflation risks, and active alpha can advance the journey to an investor’s final destination.
John Bilton is head of global multiasset strategy at J.P. Morgan Asset Management. He is based in London. This content represents the views of the author. It was submitted and edited under Pensions & Investments guidelines but is not a product of P&I’s editorial team.
