Real assets more attractive as ‘safe’ asset-returns look ‘bleak’

The 6% annual returns JPMorgan AM predicts infrastructure equity will generate over the next decade, will ‘offset a lot of the pain that will at some point come’.

Infrastructure and other alternative assets are set to form an increasingly important part of investors’ portfolios as the outlook for returns from some ‘safe-haven’ income-generating assets like bonds looks “bleak”, according to JPMorgan Asset Management.

The asset manager published the 2020 edition of its Long Term Capital Market Assumptions this week, which forecast the average annual returns investors can expect for more than 50 asset classes over the next 10-15 years, PDI‘s sister publication Infrastructure Investor reported.

JPMorgan AM argued that bonds and other similar fixed-income assets are no longer offering the combination of portfolio protection and positive income that they have in the past, so income-generating real assets like infrastructure and real estate now look relatively more attractive.

The return available from holding stocks looks more attractive than that available from bonds, the firm said. But, already-high prices in equities markets may limit future returns there, too, leading some investors with lower short-term liquidity demands to look at alternative assets.

“Previously you got paid to take out that insurance of bonds,” JPMorgan AM global multi-asset solutions strategist Patrik Schöwitz told a media briefing in Sydney this week.

“Now, depending where you are in the world, you’re not actually paying for it but you’re not earning anything while you’re waiting for the downturn to come. And you’re just giving that [income] up year after year while you’re waiting for the payoff to come.

“Whereas in a lot of real estate and infrastructure, and other income-generating [asset classes], if you’re basically going to earn 5-6 per cent extra income every year for a number of years, that’s going to offset a lot of the pain that will at some point come.”

The firm projected that returns from infrastructure equity would be 6 percent over the next 10-15 years, the same as its forecast in 2019. Predicted returns from infrastructure debt fell to 3.3 percent from 4.75 percent because of general assumptions around credit markets.

In its Long Term Capital Market Assumptions report, the firm said core infrastructure was likely to remain in demand in coming years because of the continuing appetite for green investments.

“The European Investment Bank, for example, has signalled its intent to increase green investment following strong political support. The heightened popularity of green parties and intensified focus on environmental, social and governance scores in evaluating investment mandates support strong demand for green infrastructure investments. Moreover, most green investments are likely to carry government guarantees, backed by tax receipts, that can improve the quality of the cashflows and reduce the credit risks underlying these long-term projects,” it said.

Supporting this thesis, the EIB this week announced it would stop lending to fossil fuel projects, including gas, from 2021.

JPMorgan AM said infrastructure assets could act as diversifying safe assets for investors who are able to hold them through the economic cycle and harvest the illiquidity premium that is embedded in asset pricing. It also argued that a lower valuation reporting frequency meant that volatility is lower.

It added that manager selection was still the primary determinant of returns across alternative investment asset classes including infrastructure.

Kerry Craig, global market strategist at JPMorgan AM, said in a statement on the release of the LTCMAs: “Looking for protection in government bond markets is like jumping off the high dive platform into a paddling pool. Alternative assets are going to become more important in filling the pool of income-generating assets and improving risk-adjusted returns.”