Looking through the gloom of geopolitical events, the US bank's asset management arm sets out a relatively upbeat outlook for how major asset classes will perform, suggesting that adding "diversified alternatives" such as private equity can raise risk-adjusted returns.

JP Morgan Asset Management has raised its forecast annual return for a US dollar 60/40 stock-bond portfolio to 7 per cent over the next 10 to 15 years, up from 6.4 per cent in last year’s edition. The report helps shape how the firm and its clients think about asset allocation.

“Return matters, but it is no longer the whole story,” Grace Peters, global co-head of investment strategy at JP Morgan Private Bank, said. “With dispersion wider than it has been in years, investors anchored to a disciplined strategic asset allocation will find this a more compelling environment than the headlines suggest.”

For a “60/40+” portfolio, where investors put 30 per cent into diversified alternatives, the projected return rises to 7.5 per cent, with a Sharpe ratio 21 per cent higher than the plain 60/40. Last year that figure was 6.9 per cent, with a 25 per cent Sharpe ratio uplift. (The Sharpe ratio measures the performance of an investment such as a security or portfolio compared to a risk-free asset, after adjusting for its risk.) 

(This news service has contacted JP Morgan to clarify this point about whether a 30 per cent move into alternative assets would change the split in the overall portfolio from 60/40 and will update in due course.)

Close correlations between stocks and bonds, which have tested the wisdom of the 60/40 approach, make further diversification necessary, many in the industry have argued. A decade-plus of ultra-low interest rates after the 2008 financial crash hit bond yields and equity yields, encouraging an inflow into private markets because of their illiquidity premium. 

The Long-Term Capital Market Assumptions report, now in its 31st edition, draw on more than 90 portfolio managers, economists and analysts. The assumptions cover more than 200 assets in over 20 base currencies and underpin strategic asset allocation across the group, including at JP Morgan Private Bank.

In its explanation about the assumptions, JPMAM said: “We centre the 2027 edition on three forces with durable implications: Economic nationalism (governments’ more domestically oriented posture); faster diffusion of technological innovation (tech adoption) and the reconfiguration of how and where public and private funds are deployed (capital rewiring).”

JPMAM said the developed world has the strongest growth outlook in 15 years. It expects an AI-centred investment cycle extending to 2040 to raise total factor productivity by 50 per cent, to 120 basis points. That pushes its US real GDP growth forecast to 2.1 per cent and developed world nominal growth to 4.2 per cent. Labour and demographic constraints still weigh on long-term growth, and the firm expects inflation to remain more volatile, citing demographics, large government deficits and geopolitics. It frames the outlook around three forces: economic nationalism, technology adoption and a shift in public and private capital flows driven by rising domestic investment.

In equities, the US large cap forecast will rise by 80 basis points to 7.5 per cent, on profit margins above 15 per cent, though elevated starting valuations and concentration remain risks. 

Global equities are projected to return 7.5 per cent in dollar terms, up from 7 per cent, helped by continued but slower dollar depreciation. Emerging market equities will fall to 7.1 per cent as AI and capital expenditure tailwinds normalise. Developed market equity projections overtake emerging markets for the first time in the report’s history, the report continued. 

Higher real yields will lift the global aggregate bond forecast to 5.3 per cent, the highest in two decades and up from a low of 2.1 per cent in 2021. US intermediate Treasuries are expected to return 4.6 per cent, up from 4 per cent a year ago. US investment grade credit is forecast at 6.1 per cent, reflecting higher baseline rates and heavier issuance from hyperscalers. US high yield rises to 6.7 per cent from 6.1 per cent, with a fair value spread of 440 basis points. 

The largest upgrade among alternatives is for diversified hedge funds, raised 140 basis points to 6.7 per cent.

The global core infrastructure area will rise to 7.1 per cent from 6.5 per cent, supported by manufacturing reshoring. Private equity will edge down to 9.8 per cent and US core real estate will slip to 8.1 per cent, while European core real estate rises to 7.1 per cent from 6.9 per cent. Broad commodities increase to 4.8 per cent; gold is unchanged at 5.5 per cent and timberland dips to 6.2 per cent.

The report includes a return range for bitcoin for the first time but does not include it as an allocation.