2022 Global Alternatives Outlook

J.P. Morgan Releases 2022 Alternatives Outlook Urging Investors to Embrace Megatrends to
Overcome Challenging Public Markets

The Alternatives industry’s highly comprehensive report features views from the firm’s 18 investment engines across private credit, private equity, hedge funds, real estate, infrastructure, transportation and timber.

January 21, 2022 – J.P. Morgan Asset Management today released its fourth annual Global Alternatives Outlook, providing a 12-to-18 month outlook across every key alternative asset classes and highlighting the views of the CEOs, CIOs and strategists from the firm’s USD 200+ billion alternatives platform.

This year’s report, titled “Seeing the Forest and the Trees”, encourages investors to consider opportunities presented by megatrends across alternative asset classes as it becomes increasingly difficult to generate stable income-driven returns and alpha through the public markets alone.

“Our 2022 Global Alternatives Outlook is focused on helping our clients see the forest and the trees, by considering not just the short-term outlook for markets and economies, but also the bigger picture challenges and opportunities across alternative investments,” said Anton Pil, Head of Alternatives, J.P. Morgan Asset Management. “While investors are clearly challenged by both stretched valuations in traditional markets and persistently low bond yields, we see ample opportunities for those investors willing to embrace megatrends across alternatives in areas such as
ESG and technology.”

“We are constructive on the global economy as we head into 2022 but recognize that investment returns in public markets may be more difficult to come by,” said David Lebovitz, Global Market Strategist, J.P. Morgan Asset Management. “Against this backdrop, it will be essential for investors to embrace alternatives as they navigate a world characterized by muted expected returns, historically low interest rates and elevated volatility.”

The 2022 Global Alternatives Outlook also provides a framework for investing in hybrid-like alternatives – alternatives sectors and styles that exhibit equity-like and fixed-income-like characteristics – for both income and alpha opportunities.

Some of the key sector themes revealed in the 2022 Global Alternatives Outlook include:

Hedge Funds

• Strong Alpha opportunities in 2022 with the CBOE Volatility Index (VIX) unlikely tosettle back to its pre-pandemic levels of 15-20 in the coming 12-18 months.

• Inflation both a headwind and a trading opportunity – While inflation poses a challenge for investors, we expect hedge fund managers could thrive.

• Secular themes a continued focus – Biotechnology, sustainability, cybersecurity some of the key themes implemented.

Real Assets

• Infrastructure

o Many governments have pledged their commitments to transitioning to a lower carbon world, making investors even more enthusiastic about long-term investments in infrastructure – renewable energy in particular.
o Strong governance, carbon disclosure and improving sustainability expected to be key themes underlying the outlook for infrastructure.

• Transport

o Seaborne trade volumes are back to pre-pandemic levels and expansion is forecasted to be at trend with 4.4% growth projected in 2021.
o Investment will be needed for R&D and innovation of new technologies, modification of existing assets; design and construction of new assets, and investment in a new global infrastructure to support new types of fuel.

• Timber

o Working forests can sequester carbon – a natural solution for meeting global emission targets.

o Forests provide investors with other environmental, social and governance opportunities, from biodiversity to rural jobs.
o Pent-up U.S. housing demand and low interest rates are spurring demand for lumber.
o A timberland portfolio can act as a portfolio diversifier, providing income opportunities from wood products while potentially serving as an inflation hedge.

Private Credit

• A focus on strong covenants – “Covenant-lite” loans represented more than 80% of U.S. institutional leveraged loan issuance in 2021, a share that has risen steadily since the crisis. We are not willing to sacrifice strong underwriting standards.

• A more competitive private credit backdrop – Private credit has grown to encompass even ‘tier-one’ billion-dollar mega-deals and loan volume has burgeoned, creating a more competitive market.

• A continuing preference for middle-market lending – Medium-size companies, both publicly traded and privately owned, comprise a less-crowded niche many of our investors may prefer.

• Focus on mortgage lending given low household debt service ratios – Multi-family real estate debt remains popular, given its general stability and potential for rent growth as an inflation hedge.

Private Equity

• Strong investor demand – Driven by the expectation of superior private (vs. public) market returns. Investors are also rebalancing back to target allocations, given high distribution volumes, and non-traditional and cross-over investors have increased their participation, specifically in pre-IPO opportunities.

• An expanding opportunity set – Technological innovation is among the most potent forces generating venture capital, growth equity and buyout opportunities, not only among traditional tech companies, but across almost every sector of the economy.

• Venture capital, growth equity, buyouts present key opportunities – Technological innovation and adoption is driving attractive valuations across venture, growth capital. Attractive opportunities exist in primary funds and co-investments in lower middle market buyouts.

Real Estate

• Growth is back – and with it, inflation – Global investors, alert to the threat of rising interest rates, are increasingly focused on real estate and real assets as alternative sources of yield and inflation protection.

• Quality is key – In 2022, we expect that many asset owners will have the flexibility to increase rents at or above the inflation rate in real estate sectors characterized by moderate supply and robust fundamentals. Conversely, sectors with high vacancy rates and excess supply pipelines may see revenues fall below the inflation rate unless rents keep pace.

• Significant opportunities in European office – European office properties now afford the greatest potential mispricing opportunities. Although there is a growing acceptance that offices will remain at the center of our working lives, the pandemic has accelerated the sector’s ongoing transformation.

• Strong residential demand – Structural supply shortages and affordability issues continue to drive the investment case for residential assets, which remain attractive. Although low current yields and restrictions on rent increases are likely to limit the upside, the sector’s improving liquidity and potential stable returns suggest that investor demand will continue to be strong.

About J.P. Morgan Global Alternatives

J.P. Morgan Global Alternatives is the alternative investment arm of J.P. Morgan Asset Management. With more than 50 years as an alternatives investment manager, US$201 billion in assets under management and more than 700 professionals (as of September 30, 2021), we offer strategies across the alternative investment spectrum including real estate, private equity, private credit, hedge funds, infrastructure, transportation and liquid  alternatives. Operating from offices throughout the Americas, Europe and Asia Pacific, our independent alternative investment engines combine specialist knowledge and singular focus with the global reach, vast resources and powerful infrastructure of J.P. Morgan to help meet each client’s specific objectives.

About J.P. Morgan Asset Management

J.P. Morgan Asset Management, with assets under management of USD $2.7 trillion (as of 9/30/2021), is a global leader in investment management. J.P. Morgan Asset Management’s clients include institutions, retail investors and high net worth individuals in every major market throughout the world. J.P. Morgan Asset Management offers global investment management in equities, fixed income, real estate, hedge funds, private equity and liquidity.