One of the world's largest asset managers estimates emerging markets equities will outperform developed markets by 2.75 percentage points over the next 10 to 15 years.
Releasing its 2019 Long-Term Capital Market Assumptions (LTCMA) in Australia this week, J.P. Morgan Asset Management upped its return forecast on emerging markets by 50 basis points to 8.5% over the next decade.
The call is based on what the asset manager sees as further divergence between the economic cycles of emerging and developed markets.
Speaking to Financial Standard, J.P. Morgan Asset Management (JPMAM) head of global multi-asset strategy John Bilton said this divergence means investors in emerging markets equities would likely see increased returns accrue over the period.
The LTCMA report goes on to say that as much as 80% of forecast returns in developed market equity will come from dividends and buybacks, compared with less than one-third in emerging market equity.
Bilton explained JPMAM is cautious about the end or tails of an economic cycle in developed markets "and if we do enter into a downturn, emerging markets would not necessarily outperform."
This is where an element of market timing can creep in for institutional investors, Bilton said. The asset manager's tactical framework (separate to the LTCMA) is more cautious about these economic cycles in the near term, he added.
Elsewhere the LTCMA report goes on to say that strategies managing outside their mean late in the cycle must optimise market risks with regard to traditional investment frameworks. These strategies must also recognise that traditional frameworks don't capture factors such as illiquidity risk.
Bilton said mean reversion frameworks have serviced investors pretty well as a tool "in the past 50 to 70 years but they're not the only thing we should consider."
JPMAM global market strategist Kerry Craig said Australian long-term investors such as superannuation funds are looking beyond the end of cycles and are still eager to be active in the market to meet liabilities. Although there is more caution about when to enter the market, Craig said.
This doesn't mean long-term investors should ignore the short-term either.
"Unless you were at the equilibrium of all the asset classes you're investing in, then the short-term picture is always going to matter to you, by construction," Bilton said.