Is the 60/40 portfolio about to make a comeback?

After a chastening year, JP Morgan tips an old favourite to come roaring back

Light at the end of the tunnel
Photo by Claudia Soraya on Unsplash


Investors are in dire need of some good news. As such, the latest JP Morgan Asset Management Long Term Capital Markets Assumptions research will be music to their ears. “The best long-term opportunity to invest in a decade,” was its conclusion, with a 60/40 portfolio forecast to deliver an annual return of 7.2% over the next decade.

Both bonds and equities will contribute significantly. Grace Peters, head of investment strategy EMEA at JP Morgan Private Bank, said: “Bonds are back. Bond yields have tripled over the past year. These are the highest forecast bond returns since the global financial crisis… bond returns this year are higher than the forecast equity returns last year. There has been a huge turnaround.” Equities are no longer expensive, she adds, pointing out that the S&P 500 has lost the equivalent of the economic footprint of Germany, Japan and Canada combined. Large cap US equity returns are now forecast to be 7.9%, up from 4.1% last year.”

She says: “Importantly, we don’t think the fundamentals are broken. There isn’t an impairment of the businesses.” This is in contrast to the Dotcom bubble and the financial crash when there were real structural problems for businesses.

The research showed that there will be a return to normality in financial markets, with different asset classes assuming their traditional roles in portfolios – ‘equities providing strong capital appreciation, fixed income providing meaningful income and alternatives providing diversifying exposure to unique return streams’.

Peters adds: “We are back to par. The valuation fog has come out of risk assets and therefore this is a great time to be building for the long term.”

This will be good news for investors who will be gloomily counting their losses after a dismal year, but it does appear to neglect many of the pressing structural problems facing the global economy. John Bilton, head of global multi-asset strategy at JP Morgan Asset Management, admits the report’s conclusions may seem “bizarrely optimistic” in the face of rising inflation, a war in Ukraine and a prolonged recession. However, he points out that these are long-term forecasts, and they don’t obscure the possibility of volatility in the short term.

Nevertheless, these problems are ebbing. Peters says: “We’ll still hear lots about inflation as we move into 2023 and beyond, but there is good reason to think high inflation is not going to be permanent. Central banks very much committed to their inflation targets. We have increased our forecast to 2.6% from 2.3%, but there is an expectation that inflation will revert back to trend.”

This is still a controversial view. Stefan Hofrichter, head of economics and strategy at Allianz Global Investors, says: “Given that the unremitting trajectory of monetary policy is likely not yet priced in by markets, we expect risk assets to remain in stormy waters. Even though valuations have started to adjust, we still find bond markets and the US equity market unattractively priced. An important consideration: the Fed explicitly aims to engineer tighter financial conditions – including lower asset prices – to achieve a slowdown in the economy. That way, the US central bank hopes to bring down inflation.”

He believes the US will ultimately fall into recession as higher financing costs and the fall in disposable income bite. These factors will combine to slow corporate earnings growth and suppress corporate investment. He does expect to see potential opportunities to re-enter bond and equity markets, but only in the course of 2023: “Bonds, but also equities, could stabilise and rebound once market expectations for rate rises overshoot the required adjustment. Typically, this happens towards the end of a tightening cycle.”

Sebastien Page, head of global multi-asset at T Rowe Price, believes there may not be much value in waiting until next year to re-embrace risk assets: “There is an abundance of doom and gloom in global economies and financial markets, leading many investors to remain prudently defensive moving into 2023. However, the bad news is starting to seep into the pricing of some asset classes and select valuations are compelling. There is little sense in waiting for a market bottom, which are nearly impossible to predict. Our asset allocation committee is combining some defensive positions in cash (relative to our strategic weights in stocks and bonds), with selective risk-on tilts where valuations are compelling, including in actively managed small cap stocks and high yield bonds.”

The JP Morgan Asset Management research gave a sharp reminder of the dangers of missing the best days in markets. It shows that missing the best 10 days in markets over the last 20 years has reduced an investor’s annualised return from 9.76% to 5.56%. Those best days can come when they are least expected – it shows that seven of the 10 best days in markets occurred within 15 days of the 10 worst days.

It is plausible that this recovery has started already. The MSCI World index has seen a tentative revival since mid-October. This could be an early Santa rally, or it could be something more enduring. Earnings have been more resilient than expected and better inflation news from the US has encouraged investors. This would certainly be an optimistic view, given that most major economies have only just entered recession. However, it may be that markets have passed the point of maximum pessimism.

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