J.P Morgan Global Alternatives, the alts investment arm of J.P. Morgan Asset Management with more than $150 billion in managed client assets, has released its third annual Global Alternatives Outlook, offering a fairly robust forecast for the next 12-18 months across key alternative asset classes.
“After the unprecedented events of 2020 and the ensuing economic recovery, jump-started by swift central bank action and fiscal stimulus, investors continue to hunt for yield to take advantage of underlying consumer strength and resilient fundamentals across global economies,” said Anton Pil, Head of Alternatives, J.P. Morgan Asset Management, upon the report’s publication. “In this environment, alternatives, perhaps once considered optional in investors’ portfolios, have become essential.”
A pause, and then a surge
JPMAM expects a growth “pause” in early 2021 as the global economy “catch(es) its breath,” the duration of which will depend on the path of the virus and subsequent policy response. Policy initiatives passed to date should be supportive for growth, as Europe has apparently austerity measures off the table (for now) and the U.S. is implementing additional fiscal stimulus passed in December. Any lack of fiscal support or “abrupt change” in the tone of global monetary policy (which is expected to remain extremely accommodative) could yet undermine the nascent recovery. Other downside risks include snags related to vaccine distribution or a rogue mutation in the virus itself that renders current vaccines ineffective.
Inflation risk, they say, could surprise to the upside, were consumer demand to surge during the second half of the year in a highly liquid economic environment (i.e. “too much money chasing too few goods”). That said, above-trend unemployment and output gaps—along with a mixed bag (normatively speaking) of entrenched structural trends, such as increasingly widespread technology adoption, income inequality, and “graying” demographics—will put a lid on inflationary pressures.
“As the threat of the virus fades, we expect a material acceleration in the pace of services sector activity amid pent-up demand for restaurant dining, entertainment, travel and other services impact by the pandemic,” the analysts wrote. “This suggests a surge in economic activity during the second half of 2021 and into the beginning of 2022. We expect it will be accompanied by a strong increase in corporate profits, particularly for the hardest-hit sectors.”
While this could benefit selected real estate sectors that have had varying degrees of negative exposure to pandemic-related closures (i.e., office and some retail), JPMAM notes that industrial and logistics real estate—the runaway winner of the pandemic period due to technological advances in manufacturing and in-commerce—will be “greatest beneficiary of accelerating mega trends.” JPMAM expects demand for traditional industrial assets (e.g. warehouses) to continue unabated, along with specialized core assets such as data centers, cold storage and truck terminals.
More broadly, the firm expects investors to continue shifting their focus from public to private markets as they seek out cyclical business situated in a kind of “Goldilocks” (ed: our phrase) position: i.e., those that have experienced temporary pandemic-related disruption (i.e., price discounts) while avoiding long-term demand destruction.
AID
For investors seeking alpha, income and diversification (AID) in a market short on all three, JPMAM says alternative assets may deliver all of the above—particularly in an environment where the firm’s 2021 Long-Term Capital Market Assumptions are forecasting an annual 4.2 percent return from the traditional 60/40 stock and bond portfolio over the next 10 to 15 years, and where public markets are beset by the unusual co-occurrence of ultra-low bond yields and ultra-high stock valuations.
Specifically, they say, yields on “tangible hybrid high quality assets” (i.e., core real assets such as real estate and infrastructure) have been resilient throughout the pandemic, despite yields on traditional fixed-income instruments hitting all-time lows, leading JPMAM’s analysts to conclude that core real assets “look mispriced” by comparison.
A relatable metaphor
”When paper towels were nowhere to be found, kitchen rags came to our rescue. A similar sort of flexibility powers the growing use of alternatives in multi-asset portfolios,” they write. “Indeed, the AID (alpha, income and diversification) from alternatives is accelerating their transition from optional to essential portfolio components.
“Alternatives can be used for both re-risking and de-risking, and today alternative assets offer very attractive risk premia across the board. We encourage investors to use this early-cycle window to take advantage of the alpha opportunities arising from pandemic dislocation, while building in income, diversification and portfolio resilience.”
A few standout themes
Across asset classes, JPMAM writes, the ongoing carbon transition away from fossil fuels should create investment opportunities, across themes of renewable energy, transportation and energy efficiency, not just in Europe (an adherent of such policies for longer), but also the U.S. under the newly-minted Biden Administration, and the newly climate-hawkish China.
Social advances, specifically the rise of middle-class consumers in emerging markets such as India, Indonesia, and in parts of Latin America, where consumer technology adoption rates are accelerating, also present compelling opportunities for thematic investment.
Finally, JPMAM makes a case for core private infrastructure assets—lower-risk infrastructure in regulated, long-term contracted markets for essential services like water, heat and electricity—as a “standard part of institutional asset allocation,” similar to real estate 20 or 30 years ago.
Moreover, the analysts note, pandemic lockdowns revealed real disparities in the performance of core versus non-core infrastructure assets. Specifically, the latter group of (non-core, higher-risk) infrastructure assets with volumetric and/or commodity exposures, such as airports, marine ports, energy and toll roads) underperformed on a relative basis.
“The experience of 2020 has reaffirmed the role of private core infrastructure equity as a lower-risk, more forecastable source of diversification, inflation protection and yield in multi-asset portfolios,” wrote Nicholas Moller, Investment Specialist in JPMorgan Asset Management’s Infrastructure Investments Group. “It has also pointed the way to opportunities to be found in 2021. In particular, the past year has underscore the benefits of an integrated ESG (environmental, social and governance) approach, with a focus on governance and stakeholder engagement, in core infrastructure investments.”
The team adds that while relations between the new Biden Administration and Congress on the President’s sweeping trillion-dollar infrastructure proposal, U.S. solar and wind energy capacity will continue to accelerate and utilities will also stay on track with the ongoing transition to renewable energy sources. Besides these more direct market exposures, JPMAMA expects complementary investment opportunities to emerge in electricity transmission and utility electric grids.
