Despite recent growth in alternative assets, the woman who leads J.P. Morgan’s global investment strategy believes many of the bank’s clients remain ‘underweight’ in the asset class.
At the same time, Grace Peters, co-head of global investment strategy at the US-based lender, noted that many family offices had doubled down. ‘Some of our largest families have up to 45 per cent in alternatives now,’ she said.
Peters was speaking in London yesterday at J.P. Morgan‘s 26th Long-Term Capital Market Assumptions (LTCMAs). The annual briefing, which is closely watched by the bank’s family office clients, provides a 10 to 15-year forecast for risks and returns across various asset classes, taking into account real world market and geopolitical factors, as well as insight from over 100 experts.
‘Family offices think in decades, not quarters,’ said Peters. ‘Our long-term assumptions resonate deeply with them, offering the insight and discipline to position portfolios for durable, generational success.’
With inflation rising from the lingering supply chain disruptions of the pandemic, the war between Russia and Ukraine and increased consumer demand, alternative assets are a way to anchor an investment portfolio consisting of higher risk investments, as well as diversifying it, the briefing revealed.
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Inflation risk and a positive correlation between the returns of stocks and bonds ‘speaks to the importance of alternative investments to hedge those upside inflation risks, ’ said Peters. However, she added: ‘Many clients are still underweighting alternatives.’
Karen Ward, chief market strategist for EMEA at J.P. Morgan Asset Management, shared Peters’ sentiments about the report’s relevance to family offices and the threat of inflation. ‘Many family offices cite inflation as one of their worries, and yet they have very little infrastructure to combat exposure to it,’ she said.
‘What we are really trying to hammer home as our key portfolio theme is the world has changed and because of that we have got new risks and particularly risks like inflation and therefore how you build a portfolio to cope with things like inflation is very different to one that was perfectly suitable 10 years ago,’ said Ward. ‘For inflation protection, you need to be using alternatives.’
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‘Capital markets themselves continue to evolve and therefore getting access to the best opportunities in things like technology, it’s really where alternatives provide you with that,’ she added.
In the report, J.P. Morgan presented promising projected returns for many alternative assets over the next 15 years. The highest assumed annual returns for any alternative asset is private equity, which was expected to generate 10.2 per cent, partly owing to growth in the AI and technology sectors. US low-risk, high quality real estate has a return assumption of 8.2 per cent as a result of attractive entry points and high yields from rental income, with EU core real estate having a forecast return of 6.9 per cent. Timberland, which is often considered to be a steady and reliable alternative asset, is expected to give a return 6.3 per cent, which is an increase on last year’s figure of 5.3 per cent.
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While investing in AI offers opportunities, Peters noted that the technology requires serious investment in the infrastructure backing it. ‘One of the bottlenecks, therefore being an opportunity for investors, is the power needs. If you think of the power needed for ChatGPT versus Google, it is a ten fold increase. The grids are not prepared at the moment to deal with that much power.’
Overall, AI would prove to be a major force for good in the global economy, said John Bilton, Head of Global Multi-Asset Strategy at JP Morgan Asset Management.
‘The economic landscape is shifting palpably,’ said Bilton. ‘But, in our view, much of what worries investors today will ultimately pale beside the silver linings we see breaking through over the long run.’
‘At the moment the tech firms just keep on delivering,’ he said. ‘The fact everyone is telling me it [AI] is a bubble tells me it has much further to go.’
[See also: Wealth managers must embrace AI as industry warned over complacency]
