“So even after a difficult year, those of you who are still concerned that we may have some problems ahead of us are still able to build returns while derisking at the same time,” Bilton said. “Truly, investors today have choices that were not on the table a year ago.”
On the macro level, all the economic influences that advisors have been contemplating this year will continue to be a presence—the war in Ukraine, the pandemic-related supply chain hiccups, the hawkish Fed, slow growth and persistent inflation, a possible recession, a reconfiguration of trade relationships and deglobalization, Lebovitz said.
“To me, there are really two key things to take away from the macro forecasts. One, this is no longer about a world which is going to be characterized by very low rates of inflation and free money. We don't think inflation is going to be a long-term issue, but we recognize that it is not going to dissipate in the course of the next couple of weeks or months,” he said. “And at the same time, these higher interest rates that we do foresee over the forecast horizon are going to lead to more competition for capital. We think that that's going to create winners and losers across the markets, and set up a better environment for active managers going forward.”
Focusing on fixed income, Coleman said she forecasts U.S. high-yield at 6.8% next year, and investment grade at 5.5%. Meanwhile, 10-year bond yield could be 4%, and 20-year-plus yields 4.2%.
“I would agree with our long-term forecasts that government bond yields do look attractive and, in fact, we've been edging higher in duration across our portfolios,” she said, adding that she anticipates the Fed may now slow its tightening going forward. “So perhaps next month we would see 50 basis points instead of what was originally expected to be 75 basis points of increase, and then perhaps one more hike of 25 basis points. Now, what's important about that is this gets us to a terminal rate for the Fed around 4.75%.”
And in the equities world, Hines said while the U.S. large-cap returns, forecast at 7.9%, are great compared to 2022, other regions are expected to do even better. “We're expecting double-digit returns on an annualized basis in areas like Europe, Japan, China, Brazil, just to give you some examples,” she said.
Hines said that when forecasting equities, the J.P. Morgan team looks at revenues, margins and capital return on a bottom-up basis, company by company.
“It’s these insights that really help to shape our long-term view of earning and valuations,” she said, adding that one area that is dragging down long-term expectations is margins. “Despite rising labor and rising input costs, corporate margins have remained elevated and are very close to peak levels as companies in some sectors have really been able to enjoy a nice amount of pricing power for sometimes the first time in several years, or even a decade. We do expect margins to recede from here, and we do think that that will create a headwind to equity market returns.”
And finally, Lebovitz assessed the alternatives universe as coming into its own, not just for return but for more meaningful diversification in the equities-bonds relationship.
“Alternatives are transitioning from optional to essential. There is an important role for alternatives to play within the context of a diversified portfolio,” he said.
Real estate, which stabilized portfolios in 2022 should continue to do the same in 2023, while private equity, private debt and venture capital could see returns of 9.9%, 7.8% and 8.5%, the report said.