Investors need to begin thinking beyond mean-reversion of markets as the end of the cycle approaches, according to JP Morgan Asset Management’s John Bilton, who said that the norms of the current environment may affect long-term outlooks. 
JPMAM’s 2019 long-term capital market assumptions (LTCMAs) – which forecast how asset classes around the world will perform over the next 10-15 years on average – have remained largely unchanged, although some signs of the end of the cycle have begun to emerge.
The LTCMAs, said Bilton – head of global multi-asset strategy at JP Morgan Asset Management (JPMAM) – allow the firm to navigate markets and are responsible for guiding $250bn in client mandates.
“My day job is figuring out asset allocation in the prevailing conditions and I get asked all the time whether I am long one asset or short the other, or overweight this market or underweight that.
“My first question is overweight or underweight compare to ‘what’? And if I haven’t got the ‘what’, my day job becomes all the harder. The LTCMAs give me the ‘what’.”
Bilton (pictured) said the long-term growth outlook was “surprisingly stable” although there have been increased discussions over what are structural and what are cyclical issues in the market.
“During the past 20 years or so, we’ve had a steady drumbeat of demographic concerns: an ageing population, productivity coming down, that kind of thing,” he said. “But we’ve hit a low point in terms of that; we’ve got all of it mostly priced-in.”
Source: JPMAM
As such, the multi-asset strategist said the secular outlook is for annualised global growth of 2.5 per cent over the next 10-15 years.
“Of course, we’re not going to get that every year: it’s going to swing around a great deal, so cyclical issues do matter,” he said.
JPMAM’s 30-strong team of experts have maintained their long-term expectations of 1.75 per cent growth for the US and 1.5 per cent for Europe and 1.25 per cent in the UK.
“The fact is we’re in a world where our populations are not growing like they used to and there’s nothing we can do about that unfortunately,” said Karen Ward, chief market strategist for Europe, Middle East & Africa at the asset management house.
“When you hear people in the US administration talking about 3 per cent as sustainable growth, I’m struggling to see that because the US working population isn’t growing at the pace it did. 
“Up until the 1980s it was growing at 1 per cent; it’s less than half that now. It’s just much harder to grow when you don’t have extra people both on supply and demand.”
Following an upgrade for European growth projections last year, Ward (pictured) said JPMAM has maintained its forecast growth rate as despite strong foundations and some reforms the continent continues to face challenges.
Meanwhile, the outlook for the UK also remains unchanged – coloured somewhat by the Brexit process, which continues to drag out.
“One of my downfalls is that I tend to take a strong view and then get vocal about it and I’ve been vocal about Brexit deal for some time,” she said.
“I do expect a deal to happen and I don’t think the trading relationship is going to be dramatically affected. However, I don’t want to say it leaves the economy unscathed for the long term.”
The strategist said the message sent by Brexit to migrants is a negative one, adding: “We just look like less of a welcoming place and that supply of workforce is an important component for growth.”
Source: JPMAM
Yet, Bilton said investors need to remember that headwinds are continuing to rise despite the seemingly unstoppable post-crisis bull run.
While it is unknown whether the bull run will continue, he said, what is known is that the cycle is becoming increasingly mature and that could pose further challenges.
“There is not a lot of economic slack: financial conditions are tightening and these are all issues for every investor whether they have got a one-day or 10-year horizon have to take notice of because starting points do matter,” he said.
Indeed, several tail risks have emerged this year including the burgeoning trade war, as well as concerns over Italy’s eurosceptic coalition government and ongoing Brexit negotiations.
“So even as a long-term investor, even building a strategic asset allocations, we have to be very mindful of these risks and factor in our long- and short-term thinking,” he added.
However, Bilton said the outlook for returns from major asset classes such as US equities, credit and US sovereign bonds look “pretty good” thanks to the stable secular outlook.
“They are a little below the long-run average but they’re not so far detached that it’s going to be an impossible dream to reach,” he explained. “If you allow for some of those cyclical factors then we’ve got some work to do, but I’d far rather have that kind of problem.
“There is nothing I can do about demographics as an investor but we do – as an industry – have the tools to manage through the end of the cycle and deploy them appropriately.”
As such, the multi-asset strategist said investors should learn to “manage outside the mean”, adding that mean reversion in markets is not inevitable.
“If we recognise that the cycle is mature and at some stage we will see the cycle turn we are talking about a discontinuity,” he said. “While it’s valuable in talking about expectations for the portfolio it won’t tell you everything.”
Indeed, investors need to question which aspects of the current economic cycle – spanning the period since the global financial crisis – have become more normal, such as extraordinary monetary policy, looser balance sheets and the extraordinary levels of return in a low-growth environment.
“The question we tend to ask as investors is which of these dislocations are merely stubborn and which are structural,” he said.
“If we think purely about mean reversion we would miss that and that’s why thinking outside the mean as a long-term investor is very critical.”
The strategist said while they do not advocate risk avoidance as the cycle begins to turn, investors should understand what types of risk they are taking in their portfolios, not only market risk, but liquidity risk, operational risk and geopolitical risk.
“All of these are features that as an industry we need to become rather more adept at accounting for and most importantly demanding risk for over time,” he concluded.