Labor Shortage Among Developed Market Headwinds

The 2019 J.P. Morgan Asset Management capital market assumptions report was unveiled this week in New York City.

Overall, the firm is projecting 2.5% global growth per year for the foreseeable future. At the same time, J.P. Morgan economists and portfolio managers anticipate increased cyclical risk, based on a variety of factors.

According to David Kelly, the firm’s chief global strategist, the 2019 assumptions suggest increased global financial stability. He says this is a good thing insofar as it means recessions and downturns are likely to be weaker and shorter lived relative to, say, the Great Recession of 2008 and 2009. But on the flip side, this also means that growth is likely to be slower—and that there will be fewer opportunities to exploit market rebounds.

“We take these long-term assumptions very seriously,” Kelly says, pointing out that he worked with a staff of some 35 analysts who collectively burned through more than 9,000 research hours and thousands of cups of coffee to create these assumptions. “Investors spend so much time thinking and talking about the short term—but we know that our institutional clients are truly long-term investors and that serving them effectively requires a very broad and long-term outlook on our end.”

The full market report is far too broad to be explored in one news article, and so individuals should take time to review it on their own. The analysis considers 50 different asset classes and sectors and is complemented by dozens of illustrative charts. 

In U.S. equities, J.P. Morgan anticipates 5.25% potential growth on average each year for the next 10 to 15 years. According to Kelly, U.S. equities “look pretty good,” but the macroeconomic business cycle presents challenges to investors.

“Many investors are focused on the short-term right now and they are enthusiastic to see where U.S. growth is today, especially in relative terms to the rest of the world,” Kelly says. “But from a long-term perspective we have to question the sustainability of this growth. Whether we point to tax cuts or growing government debt, the fact is that fiscal stimulus in the United States is still going on in a significant way. This will not be sustainable. Eventually, these factors could put a squeeze on performance.”

Kelly warns that J.P. Morgan anticipates potentially severe labor supply constraints in developed countries moving forward. He urges investors and policymakers to consider the importance of immigration when it comes to fueling future economic growth in developed markets.

“On the fixed-income side, there is almost a new equilibrium forming,” Kelly says. “We’ve had such great debt loads and such low interest rates that it has reshaped the behavior of central banks in a significant way. We may even see central banks keep interest rates much lower than they have in the past, simply in order to help their governments finance these major debt loads. This in turn means we may be facing lower interest rates globally than we traditionally would expect, and for potentially for quite a long time.”

Important to note for U.S. investors, this is the global outlook.

“In the U.S., we have finally moved some way towards normality in interest rates,” Kelly says. “But if you look at Europe, interest rates are still very much on the floor. The result is that, if you’re in the U.S., you can start to look towards the traditional playbook for fixed income.”

Introducing the new capital market report with Kelly this week is John Bilton, the firm’s head of multi-asset strategy and solutions. He urges investors to think about “getting paid for risk-taking.”

“As the business cycle turns, you cannot just dump all your risk assets,” he says. “You have to plan your way through. One way to keep your footing is to think about what risk you are carrying and better defining how you are being compensated—or not—for that risk. I think investors in particular should rethink liquidity risk and consider being compensated for accepting lower liquidity, for example in private equity. This type of investing will become more important as the cycle progresses.”

Kelly and Bilton urge investors to look at the distribution of the projected returns in the report—rather than just the median figures.

“When we are late in the cycle, it means we can’t just think about the mean returns or the average expected returns,” Bilton says. “You have to decide what is best for the portfolio structure you have and the cash flow requirements you have in that portfolio. Only from there can you define the appropriate level of risk and the associated anticipated rate of return.”