Financial markets are undergoing fundamental change, says Stephanie Flanders, star strategist at J.P. Morgan Asset Management. A lot of established truths have lost their value.
The speech by Stephanie Flanders (pictured) at last weeks investor conference of J.P. Morgan Asset Management in London was unambiguous, admonishing the listeners to «expect less of everything» except of «volatility».
The British economist and long-time journalist (BBC, New York Times, Financial Times), wrote speeches for U.S. Finance Ministers Robert Rubin and Lawrence Summers. She's been with J.P. Morgan since November 2013.
The fundamental change in the financial markets came in late summer, when the Chinese stock market crashed, Flanders said. The crash was however only the most visible sign of a change that will bring about lower yields across the board.
Slowing Economic Growth
The economic outlook had darkened in various regions of this world, not least in the emerging markets, which not long ago had been booming. Investors had therefore to expect lower economic growth rates, Flanders said.
Demographic changes in the Western world are leading to a situation, where a declining number of young have to finance a growth group of elderly, an equation that doesn't add up. Investors and beneficiaries of pension assets will therefore have to accept lower returns.
Rates to Remain Low
Lower growth rates across the globe will help cement the current interest rate climate, which was manifest in the «confused» monetary policy of the Fed. The interest rate hike, long in the pipeline, was continuously deferred. No central bank had been able to increase rates on a sustainable basis in recent years, Flanders stated. As this won't change in the foreseeable future, inflation won't accelerate either.
The only thing about to increase is volatility in the markets, already noticeable since the summer, Flanders said. Investors found it harder to achieve acceptable returns, leading to a more nervous and volatile stock market. While investors previously could count on an average 8 percent return on the stock market, the rate will drop to 6 percent in future.
Importance of Asset Allocation
In this changing environment, asset managers need to adapt their approach. The allocation of assets is even more important as many investment categories today yield nothing or very little. Benchmarks have lost in value and what counts today is achieving an absolute return, small though it might be.
The expert's assessment made bleak reading. There was one arrow of light though – there's no indication of a structural bear market, nothing pointed toward a spreading recession across the globe or an aggressive monetary policy by central banks. The valuations on stock markets were more or less fair, Flanders said. The strategist concluded that there was no crisis, but a need to accept lower returns and a greater modesty.
