Key Takeaways from the J.P. Morgan Asset Management “Global Alternatives Outlook”
Here are the key trends from JPMorgan Asset Management
The Global Alternatives Outlook was released by JPMorgan Asset Management this week. The report provides a 12-18-month outlook across key alternative asset classes. JPMorgan also the views of the CEOs, CIOs, and strategists from the firm’s 15 distinct alternatives investment engines.
The report reveals several key findings across asset classes. Here is the breakdown from a company release on Wednesday.
Global Alternatives Outlook on Hedge Funds
Digital transformation to drive opportunity – As tech spending continues across industries, opportunities are expected to arise as digital initiatives go mainstream, fueling capex1 and rising demand for software and services. Increased application of machine learning will continue making a positive impact on hedge funds.
Sustainability-led disruption to continue – 2020 will be a critical year2 for hedge fund managers to increase the integration of Environmental, Social and Governance (ESG) criteria and sustainability across their businesses and investment activities. The next sectors experiencing sustainability-led disruption include transport, agriculture, automotive, buildings, and industrials.
Value expected to rebound – Value is seen as one of the best bets as JPM Asset Management expects a rebound to reverse a factor trend prevalent since early 2017. JPM sees a bubble building among lower quality, higher growth names, so based on investors’ investment objectives and risk appetite, the opportunity could come from a selective short exposure, rather than just being long the value factor.
Too much money chasing too few deals? – Although significant capital has been raised for core infrastructure, it is from a relatively low base and private capital remains a small percentage of the market’s overall financing. In JPMAM’s view, equity returns remain attractive relative to other traditional asset classes, particularly on a risk-adjusted basis.
Core infrastructure remains relatively attractive – Core infrastructure equity risk-adjusted returns remain attractive on a relative basis, but the firm is seeing some investors increase their risk tolerance in order to maintain expected returns. Based on their investment objectives, investors should be focusing on assets that have the ability to provide clear visibility into long-term yield.
ESG focus remains critical – A focus on ESG considerations continues to be fundamental and aligns closely with the objectives of infrastructure investments. Renewable energy’s environmental benefits are lifting both supply and demand in the sector, resulting in the availability of long-term contracts aligned with the investment objectives of the asset class.
Increasing stability across sectors – In this period of low yields, the core-plus transport sector may be an attractive proposition for investors looking for assets classes with potential for reliable income streams resultant from long-term leases, low leverage and the financial strength of high quality, often investment grade, end-users.
Modest trade tensions impacts – Despite declines in China-U.S. trade volumes, the trade tensions have had a less severe impact on seaborne trade than many had expected. Overall, substitutions in the supply chain have mitigated the impact of the trade tensions, as JPMJPM Asset Management anticipated in the 2019 Global Alternatives Outlook.
New cleaner fuel regulations in 2020 – As of Jan. 1, 2020, a new International Maritime Organization regulation requires ships to meet more demanding fuel emission standards. Core-plus investors could consider focusing on modern, fuel-efficient vessels; these are the most attractive to lessees with long-term, ESG focused, transportation requirements.
Demand for access to U.S. consumer – Amid nervousness about corporate lending, JPM is witnessing demand for exposure to U.S. housing and consumer credit. One popular strategy has been mortgage origination to the self-employed and those who are strong financially but are disqualified by their FICO score.
Other opportunities in private credit in 2020:
- Longer duration, less-liquid mid-cap company debt – At a time when the market places a high premium on liquidity, JPMAM investors see significant value and a more attractive risk-reward trade-off in less-liquid middle-market corporate issues, relative to those of larger and more liquid issuers.
- Distressed lending and nonperforming bank loans – Strategies include “re-performing” assets created during loan modifications and restructurings, or purchased at a discount after an issuer’s creditworthiness is re-rated.
- Commercial Mortgage Loans – Another mortgage strategy is core, high-quality multi-family, industrial and office lending in the U.S. Southwest and West.
Global Alternatives Outlook on Private Equity
Opportunities in smaller private companies – While corporate finance deals are increasingly competitive, JPM still sees relatively attractive opportunities in firms with revenues of USD $10 -$100 million. These investments tend to stay below the radar and be less leveraged, with less inflated valuations than more prominent deals.
Digital innovation showing promise – With innovation most likely to emerge from smaller, lesser-known, private enterprises, high-growth opportunities will be difficult to find. E-commerce, cybersecurity, and software-as-a-service (SaaS) are a few areas where the firm continues to see tremendous promise.
Increasing ESG focus – JPMAM analysts are encouraged by investors’ increasing focus on ESG dimensions. JPMAM has an established approach to incorporating ESG factors into JPMAM’s investment process3 and assists portfolio companies and managers with which JPMAM invests to carefully consider ESG factors in their own business and investment practices.
U.S.—Beyond the traditional core – Extended core sectors are making up an increasing share of private real estate allocations as investors come to better understand these opportunities. The JPMAM team’s preferred opportunities include single-family rentals, biotech, self-storage and data centers.
Opportunities in U.S. Mezzanine debt – The JPMAM team favors two sectors while looking for income and diversification: high-quality, well-leased multi-family properties, generally outside of the super-luxury apartment sector, and stabilized multi-tenant office buildings in established markets exhibiting strong employment growth.
Europe — A heterogeneous core – Overall, modest economic growth, low vacancy rates, and limited new supply should support rental growth in major European markets. As in the U.S., JPMAM sees investors becoming more active in extended core sectors. However, since many of these sectors are in their infancies in Europe vs. the U.S., it may take longer for these core opportunities to become accessible in Europe at scale.
Asia Pacific — Still growing its traditional core – APAC appears to be at a slightly earlier stage of the economic cycle vs. U.S. and Europe. APAC core real estate returns and the diversification opportunities the market can provide are attracting investors’ attention globally. Some diversifying opportunities exist in logistics, core office markets, and multi-family markets.
To read the full 2020 Alternatives Outlook click here.
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