Building on Strength

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Logo: J.P. Morgan. Text: Outlook. Building on Strength. 2025, the year of easing global policy, accelerating capital investment, understanding election impacts, renewing portfolio resilience evolving investment landscapes, global perspectives.

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Hi. My name is Jake Manoukian. I'm the US Head of Investment Strategy for J.P. Morgan. Welcome to our Outlook 2025 webcast. As we close out 2024 and look ahead to the new year, we're excited to share insights and ideas that we think can help you navigate the evolving investment landscape.

This year's outlook is called Building on Strength. It is designed to help you build on the tremendous momentum we have seen in markets through 2023 and 2024. We believe that 2025 presents a unique opportunity to capitalize on this strength, but it's crucial to consider how these insights align with your individual goals and investment plans.

Our discussion today is structured around five key themes that we believe will define markets in the economy in 2025. Within these themes, we've identified 25 specific ideas, concepts, and insights, our 25 for 25, that we think will empower you to make informed decisions in the coming year.

I will be joined by five colleagues who will help me dive into each theme, explore the key takeaways, and identify the considerations that may help you build a resilient portfolio that is aligned to you and your family's goals. Thank you for joining us. Let's dive in and explore what 2025 could have in store.

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Easing global policy. Normalizing policy rates, U.S. and Japan over Emerging Markets and China, Productivity gains, Increased dealmaking, Continued U.S. housing shortage. Tom Kennedy, Chief Investment Strategist.

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All right, let's kick things off. Our Chief Investment Strategist, Tom Kennedy, is here to talk about easing global policy and what it might mean for our outlook. Tom, thanks for joining us.

Excited to be here.

So, Tom, the way we think about it, one of the key pillars of our outlook is that all three major economic blocks are easing in some way. The Fed cutting cycle is finally underway. The European Central Bank is lowering interest rates. And Chinese policymakers have finally gotten more serious about putting a floor under growth. So from your seat, how do you see this global easing cycle playing out?

Taking that a little bit step further there, Jake, 37 central banks that we follow, the vast majority of them are cutting rates. Really powerful environment for a global backdrop for growth. But the key word that's really consistent across all of these economies is this word normalizing. Historically, we think of rate cutting cycles as being emergencies. That's really not what we see is happening this go around.

The normalization is important because it helps secure the soft landing but not cut rates too much as to reignite inflation again. So this dynamic that's happening is quite unique relative to history. Let's take the Fed for an example, Jake.

Core inflation has fallen by 3 percentage points in the US. Outside of wartime, that's never happened in America without a recession. So really powerful, really dynamic time to be thinking about the world. It's unique for us. It's also unique for central bankers.

Yeah, I mean, I think that's important for people to realize is that central banks are cutting because inflation has normalized. They're not cutting because the economy needs it per se. But I think that leads to a fear that some investors might have, which is that the Fed won't be able to cut rates as much as they might want to just because growth has remained so strong. So what gives us confidence that the Fed, in particular, will be able to normalize interest rates?

Yeah. If all those central banks-- the Fed is really normalizing and has the ability to be a little more gradual. So from our perspective, the soft landing in America has already happened. And we've been waiting for it to happen. I think we have to call it. It's happened. Now, the Fed has to make sure that it endures.

Time to move on.

Yeah, let's move on to something else. I think what gives us confidence is the broad perspective on the US economy is this one of normalization, spending, incomes, the unemployment rate. Across dynamic number of factors, you're seeing a normalization. There's really two things that stick out as not back to normal.

The first one is interest rates compared to where the Fed tells us they'll be in year end 2026. We're still 2 percentage points higher than that. But, also, the amount of turnover that's happening in the labor market is actually slower than what we saw pre-COVID. And this is people walking into your office, Jake, and saying, I quit. The quit rate is back to 2016, 2017 levels all over again.

And then from the business perspective, hiring in America has contracted or slowed meaningfully. And you're back to 2013 levels. That should bring about-- the labor market wasn't as tight in those time frames.

So it allows the Fed this interesting dynamic where inflation has normalized. And now they can support the growth outlook and support the labor market with gradual cuts. Uniquely, if they have to speed up, they can. It's a pretty special place for them to be in.

Yeah. And I think that makes us feel good about investing in multi-asset portfolios for our clients that are aligned with our goals. But from a more tactical standpoint, if you think about a rate-cutting cycle, global policy easing, China stimulus potentially coming, does that make us more tempted about emerging markets?

I think historically, cutting cycles would have made us feel more excited about that. But given the potential tensions with a Trump administration and the conflict with China, EM is in a difficult position there. I think there's definitely opportunities one off. But in a broad blanket statement, I don't think this is the best setup for EM.

Yeah. And then thinking about Europe, like it's nice that the ECB might be able to ease. But Europe performance, at least in the large cap equity market, was a little bit disappointing over the last year. What are the prospects looking like there?

Yeah, I think the ECB is in a bit more structurally challenged environment. But let's take them in turn. The ECB has more urgency because the growth picture is just not as solid and robust as we have in America. We're expecting growth in 2025 to be 0 to half a percentage point.

Very sluggish.

Very sluggish. And that stagnant economy is telling them they should be cutting a little more aggressively than the Fed. And that's what we do have. But the bigger zoom out is that Europe has really struggled from a productivity perspective post-COVID.

So productivity growth, think of that as workers-- how much output can they deliver in the same amount of time, if they're getting more productive, more output, same amount of time? But productivity growth in Europe, Jake, stagnant, hasn't really gone anywhere for five years, whereas in America, productivity growth has been above what we would have expected pre-COVID.

Now, we try to rationalize that with Europe importing most of its energy sources, but really not having AI or tech innovation that we have in America. So it sets up a short-term cyclical challenge where cuts might help. But in the long run, Europe is facing some real productivity challenges and growth challenges.

Yeah. So what I'm hearing from you is that the economic picture in the US looks pretty solid. The Fed is still in this place where it's able to ease because they're getting the indicators from the labor market that it's OK to do so. That makes us OK being fully invested in multi-asset portfolios, probably with a little bit of a bias towards US assets relative to the rest of the world. But what are some other kind of problems that you see in the economy in the backdrop?

Yeah, I think from a opportunity set perspective is we should actually see dealmaking formation come back to life. It's really been a couple of years since we've seen significant mergers and acquisitions. IPO market has been more or less asleep for a couple of years here. And I think that's mostly high interest rates.

But, also, interest rate volatility has been very high. So dealmaking is set to return. And what's often not talked about enough is that, yes, interest rates will help that, but also this dynamic private market ecosystem that is developing, whether that be secondary private equity, where a private equity manager can sell some of their stake before the business ultimately goes public or the private credit market.

There's new sources of liquidity there, which should further incentivize dealmaking. So in the big zoom out there, why is dealmaking important? Well, banks are in good shape in that scenario. Private equity, private credit look like good opportunities as well. So this theme for us of private markets and the financialization, I think we're going to take a big step forward in 2025.

Yeah. Maybe another way to think about it is large cap equity markets are kind of at the highs. But there's a whole subset of recovery in that kind of liquidity and dealmaking space. That hasn't really happened yet.

Nice. Yeah.

OK, last question, the housing shortage-- this came up during election season. It's on a lot of folks minds. What is the prospects for this housing shortage in the United States. And where are there opportunities?

Yeah, the concept of lower policy rates should encourage people that own a home to sell or just be able to make home ownership more affordable. This concept of affordability is what's the price of your home against what is the interest rate to borrow to buy the home? And how much income do you make?

So across this matrix, affordability today is as bad as it's ever been in America and most comparable to the early 1980s. So new home buyers are really challenged in this market. And in 2025, we were expecting that to persist. The flip side of that, though, is how can you get out of this housing shortage?

You mentioned it. It's been structural. We're short, by our estimates, 2 and 1/2 million single family homes. So how do we get out of it?

Well, we don't see rates coming down too much. We don't see wages picking up that much. So really need to build your way out of it. And that really favors big, large home builders, but also folks that already own real estate. So there's a private investment opportunity set there too.

Yeah, absolutely. I mean, I think just to wrap up the rest of our conversation, the easing global policy backdrop gives us confidence that we can get invested and stay invested in multi-asset portfolios, but there are still some opportunities underneath the surface to either favor one region over the other. For us, that's really the US and to a lesser extent Japan over the rest of the world and getting invested behind a revival and dealmaking activity or taking advantage of this housing shortage that is in place in the US. Fair summary?

Absolutely.

Awesome. Tom, thank you so much for joining us. Coming up next, we're going to talk about accelerating capital investment.

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Accelerating capital investment. Al: Boom or bust? Automation & robotics. Healthcare disruption. Building power infrastructure. Redefining security. Sitara Sundar, Equity Specialist.

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All right, now we're going to dig into accelerating capital investment with Sitara Sundar. Sitara, thanks for joining us.

Thanks for having me.

So I think this is one of the sections of the outlook that's most exciting just because it's really where you see change, and innovation, and investment throughout the global economy. And we call out artificial intelligence, power infrastructure, security as some key themes.

But let's start with AI because I think this is the big one that's incredibly important to the large-cap equity universe. I mean, ever since ChatGPT was released, it's really been the buzzword, the theme. So let me ask you, is this more likely to boom or is it more likely to bust in 2025?

Look, this is the number one question on all of investor's mind and ours too when we were thinking about this outlook. But we think that it's a boom more than a bust. And there's a couple of reasons for that. One, we're entering an environment.

We're actually starting to see proof of concept on artificial intelligence, whether you think about LLM, which is a type of artificial intelligence technology and when you think about the impact that that's already making in many companies that are not just tech related. We're starting to see it in other sectors as well, industrial automation. We're starting to see it within the health care sector too.

So when we think about artificial intelligence, if it was just going to impact one sector, that would make me concerned. But it's a platform technology in which everything is going to get built on top of that, which means two things. One, the impact will be broad based. And then two, that means that inflection higher that we expect to see in earnings growth will be broad based as well, which is why we're constructive on equity markets moving forward.

Yeah. It's interesting that you say that. The way I think about it is we're still kind of in the building phase, where we're building all of this technology. But more and more, you're starting to see actual use cases and actual applications that are going to impact sectors beyond just the companies that are building the models and selling the semiconductor chips, et cetera.

And one of the implications that we talk about in the outlook is that the total addressable market here is like services activity. Like any service is really part of the total addressable market for AI technology. And there's even opportunities and companies that don't even exist yet that are going to create that application layer for the technology to actually become useful. So when you're talking to investors and portfolio managers, what are they most excited about in AI at this point?

Definitely. So I think one of the areas is automation and robotics on this idea of actually seeing tangible uses of artificial intelligence and the technology outside of just LLM and data analysis and actually being able to move from that kind of execution to reasoning.

Automation and robotics is where we're starting to see it in real time. And when we think about it from a sector perspective, a lot of the portfolio managers that we talked to are getting increasingly excited about the industrial complex, not just in terms of the amount of investment in CapEx that we're going to see, but in terms of the amount of traditional technologies that are in place. And when you think about robotics and the ability for it to increase efficiency, for these robots to be able to make decisions in real time on how to optimize the process, the industrial economy within the US and honestly globally is ripe for that.

Yeah. And I think like self-driving cars are a good example--

Sure.

--of that too. Most people think robots and they think of some like humanoid robot, which is certainly in process. But the robotics ecosystem is much broader than that. So self-driving cars are one area.

You mentioned this like in terms of warehouses and packaging and shipping. Like that's a place that's ripe for disruption from automation and robotics. So it's interesting that you make the point that AI technology and kind of machine learning has enabled robots to become much more functional because they can reason and because they can start to plan ahead.

Yeah. And I think the second thing, just to build off of this point, we're also starting to see a real-time impact in health care as well. There are many companies who are starting to use and test and train robotics. When you think about surgeries, elective surgeries and elective procedures, which we're actually starting to see an inflection higher in elective procedures after the COVID overhang that we had, you're starting to see the impact there.

But then health care is one of those sectors which is so ripe for disruption but is not being as talked about in the marketplace, given perhaps some of the binary outcomes that we've seen in biotech in the past. But as we start to see artificial intelligence seep into that industry as well, that binary outcome in biotech could actually start to reduce as we move from drug discovery to drug engineering.

So when we start to see the real-time impact, that can actually improve, perhaps, clinical trial success rates, which could add a lot of incremental revenue moving forward to the economy. So when we think about this opportunity set and when we think about all of the applications that are going to be built upon there, to your exact point before, it's not just one sector, it's services activity across the entire economy. And that's what makes us so excited.

Right. It seems like we're really just scratching the surface. The AI transition is also leading to a surge in demand for power. So that's another key trend that we see. And I just wonder like, how investable do you think that trend is?

Look, I think that we've already started to see the market appreciate some of these opportunities in real time when we think about utilities, especially within the nuclear space over the past year. But even within that area, we still think that we're just in the early innings. Over the next three to five years, we expect power demand in the United States to increase five to seven times. And that's just the US.

We're seeing similar types of growth rates in non-US markets as well, Europe, Japan, the like. So when we think about the investable implications of that, there are a few fold. One, it's the power generation side.

How are we actually going to be able to create the supply to meet the demand that's coming from data centers and artificial intelligence? So within that complex, nuclear, as I just mentioned, is one area. But even on the traditional sources of energy, we still see natural gas as a way to be able to create and generate that type of incremental power. And then, of course, the renewable sources of energy.

So those are the three places where we see investable opportunities today. And the final thing I'll say is you want to be able to supply the power. But even when you think about the amount of demand that's going to be there within the energy infrastructure within the United States and globally, there's a tangential opportunity set which is on increasing energy efficiency as well.

And now that's a broad term. And it can mean a lot of different things. But we're really looking at these companies that are trying to make more out of the individual sources of power that they have. They're trying to either reduce the amount of heat that's lost in different sources of power, or they're just trying to increase the efficiency in how they use the power that is generated today.

You can almost think about it as two tracks. For the next three to five years, we know we're going to need more power. So we can invest in the kind of generation and the transmission and the distribution. But over the long run, there's going to be hopefully technological advances that make these technologies more energy efficient.

Exactly that.

And then the final key theme that we see is security. And I think this ties in with energy really nicely just because the war in Ukraine has really made it apparent that sovereign nations need to secure their supplies to energy. But we think of security as much broader than that.

Correct. So I think the biggest thing is over the past few years, we've had a confluence of different things that have broadened the definition, as you mentioned, of security outside of just traditional defense. One was the war that we saw in Ukraine. The other is even the COVID overhang that we saw in terms of supply chain. I would say overreliance in certain areas of the globe--

And concentration.

--and concentration in certain areas of the globe. So when we think about that opportunity set moving forward, It's not just traditional defense. And cybersecurity, I would say, is an additional layer to that. It's energy infrastructure and being able to secure your sources of power generation and probably secure those sources of power generation a little bit closer to home.

And then it's the infrastructure side of the equation. It's industrials. And even when you think about the supply chain, it's also trying to manufacture certain things like semiconductors a little bit closer to home. So it's significantly broader than that.

These kind of critical technologies or critical goods and critical imports. There's going to be a focus from both sovereigns and corporates in making sure that they have resilient supply chains.

Definitely. And I think the other part is in the United States, there's a lot of focus on resiliency of supply chain. We talk a lot about reshoring of manufacturing activity to the US as well. And then even in non-US markets, the idea of maintaining a focus on natural resources and critical raw materials and being able to either create those in that specific area or diversify where those goods are coming from, I think, is extremely important.

Right now, especially within the EU, there's a lot of reliance on outside nations for critical raw materials like nickel, like copper. And those are critical materials that are needed for the energy transition, for semiconductors, which is therefore critical for the entire AI infrastructure. So when we think about that moving forward, it's an important implication for investors when you think about these cross-cutting themes because you want to ensure that you have exposure to all of those different facets versus just one particular area.

Yeah, it's fascinating that they're all intertwined.

Exactly.

So maybe if I could just summarize why we're positive on capital investment. There's clear need for capital across these areas. Whether it's artificial intelligence, power infrastructure, security, there need to be capital infusions there. We're in a global policy easing cycle, which should give management teams more clarity. We have this election supercycle in the rearview mirror.

When we think about it long term, corporate capital investment has been relatively weak for the last five years and seems to have room to grow. So I think you gave some great examples about where we see opportunities and where we think folks can be invested. So Sitara, thank you so much for joining us.

Thanks for having me.

Next, we're going to dig into understanding election impacts.

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Understanding election impacts. Defining Trump 2.0. Sunsetting tax policy. Anti-trust risk. Managing rate volatility. Rising anti-establishment movements. Elyse Ausenbaugh, Global Investment Strategist.

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All right, let's dig into understanding some election impacts with Elyse Ausenbaugh. Elyse, Thanks so much for joining us.

Happy to be here. Thank you.

So I know that all the focus has been on the US election recently, but it was a global election super cycle. And one of the most fascinating things that happened in this election super cycle is that not one incumbent party gained vote share, which meant that constituencies wanted leadership out. Why do you think that is?

Look, I think when you look across the global landscape, the zeitgeist that's kind of been in motion is this rise of an anti-establishment attitude. As far as investors are concerned, that certainly has increased some uncertainty and volatility perhaps in markets. And so what we're really focused on is embracing what we know about policy proposals that are being put forward and using that to inform how we might make tweaks to portfolio decisions.

Got it. So let's start with the US.

Sure.

We have President Trump coming back into office. We have a Republican-controlled House and Senate. What do you think that means for investors?

So the red wave I think is going to have implications for three key areas, particularly in the near term. Investors need to be watching what happens with taxes, with regulation, and with trade policy. Longer term, I definitely think we need to continue to monitor what's going on with the outlook for government deficits and debt, both in the United States and abroad, but we're not necessarily expecting that to bubble up as a key market driver in 2025.

Got it. So when you think through the balance, it seems like the bull case is really driven by deregulation and potential extension of the Tax Cuts and Jobs Act from 2017. But investors are certainly worried about tariffs and to maybe a lesser extent, immigration. So where does that all net out for us?

Yeah. So starting with that bull case, I think that's what helps us explain the kind of knee-jerk market reaction once we knew that election outcome. As you mentioned, this expectation that probably all provisions of the Tax Cuts and Jobs Act are going to get extended, I think, relieves some overhang for markets in the near term.

The prospects for deregulation, I think, are embraced as having this potential to do things like free up bank capital, potentially increase M&A activity. And so you're getting that sort of pro-cyclical thrust. Now, those are the tailwinds. And as you mentioned, the potential headwinds might be things related to tariffs.

And very big picture where it kind of leads us to is this expectation that the United States, particularly when it comes to the equity market, is likely to outperform the rest of the world because I think until we have full clarity on the broad extent of tariffs, it's really hard to understand what that ultimate growth impact will be. But at least domestically, our base case is that those positive tailwinds will help offset some of those potential headwinds coming from changes to trade policy.

Got it. So it seems like on the net, it's marginally positive. But there are certainly risks that we should watch as investors coming from the political landscape.

I think that's fair. Yeah.

And then another thing that's been in the news is this idea of antitrust policy. And it seems like we might get a little bit of relief on the antitrust side, but what are the kind of gives and takes there?

I think you have to continue to monitor. I mean, to your point, there's this expectation that perhaps that becomes a little less onerous of a headwind for markets. But nonetheless, when you think about these big conglomerate type of companies over multiyear time horizons, it is something worth continuing to monitor. And so I think when we're thinking about portfolio like applications or implications, the potential call to action would be to ensure diversification and that exposure to those parts of the market isn't getting too offsides.

Got it. So it's this idea of a resilient portfolio and making sure you don't have an overly concentrated portfolio that's exposed to that potential risk.

Exactly. And I know you yourself did a ton of work looking through those concentrated positions. Do you want to share some of the--

Yeah, you flatter me. Wow. I didn't realize I--

--key takeaways?

--was getting interviewed now.

No, I mean, it's just that we found that almost half of the companies in existence in the Russell 3000 end up underperforming the index. And a equally large share of those companies suffer catastrophic declines. So managing that concentration risk is incredibly important. You alluded to this earlier. And maybe it's just because you didn't want to answer the question.

But rising deficits are clearly on top of investors' minds. And when we've looked at the reaction of the bond market in response to the US election, yields have shot up. Some people think that's just reflecting better growth prospects. But there is this kind of undercurrent of deficit fears. So if you're an investor, what should you actually do about it?

Well, for starters, I do want to talk about what we think is really driving that rise in yields, which seems more closely tied to expectations for growth in the Fed. Because when you look at other things associated with the deficit and the risk metrics that we would monitor, demand for treasuries is still fine. And those auctions are about two to three times oversubscribed. You're still seeing the 10-year Treasury yield mostly driven by those growth and Fed expectations.

So for now, it's not a very big issue. But I think longer term it might prompt markets to demand higher compensation, particularly for lending governments money for longer periods of time. And so that could lead to some interest rate volatility going forward. And I think it's kind of a call for active management and bond portfolios, particularly if up to this point, you've been kind of a buy-and-hold bond investor on that side of your portfolio.

And then this might move into the next kind of category that we're talking about about renewing portfolio resilience. But if you are worried about burgeoning government deficits, if you are worried about the potential inflationary impacts of continued fiscal spending, adding things to your portfolio that are less correlated with stocks and bonds, but still give you those diversified sources of income or diversification, could be really attractive. So maybe we can pivot to talking about renewing portfolio resilience.

Yeah. And I think, in particular, the first place we might look is to an asset like gold. It is the original safe haven asset. And we do think that that's going to be the go to place, particularly if you're concerned about those like deficit risks.

You've seen other central banks around the world start to diversify their own reserves by increasing their allocations to gold. And so investors might consider doing the same. But if it's the inflation risk that you're more concerned about, I think that's where those income-generating real assets can really be beneficial additions to that traditional stock bond mix.

Got it. So when we think about real assets like, what do you really mean?

Real estate, infrastructure. Think things that are going to be able to generate those cash flows and have some link in pricing power if inflation does start to re-accelerate and move higher. That income generation, in particular, we think, can be a really helpful kind of steady support for portfolios going forward.

So I mean, just to give an example, when you're a landlord, obviously, you're going to raise your rents if inflation is rising, if the economy is tight, if there is expansion, if there is demand that outstrips supply. So if you can be yourself a landlord in your investment portfolio, you should be able to benefit from that pass through of inflation. And that's really what we're looking for.

Yep.

Got it. So the final thing that I think we should put in the context of this entire discussion is that people are in a pretty good place. I mean, when you think about what multi-asset portfolios have done not only in 2024 but also in 2023, performance has been really spectacular just from your market exposure.

So why don't you just give some other considerations for folks who have been invested throughout this run in the stock market and maybe think about some of the tweaks and changes they can make along the edges to ensure that those gains continue to hold.

Surely. I mean, even despite those inflationary headwinds, asset holders have really benefited from this big market rally, the appreciation of things like property values. And we are really focused on helping them defend that surge in their wealth. So maybe that looks shifting the composition of your portfolio to focus more on income generation like we talked about before.

And by the way, you can even do that on the equity side of your portfolio using something like dividend-oriented equities. You can also adjust the risk return trade off of your equity allocation by employing something like derivatives or structured notes as a means of targeting a certain level of return while potentially getting some downside protection.

So sorry, on the dividend side, I think it's interesting because another worry that I hear and I'm sure you hear too is the market's extended. It's at all-time highs. Valuations look full. But those dividend-oriented equities, those quality income-oriented equities, are trading at a pretty substantial discount to the rest of the market.

Yes, which is certainly hard to find in today's market. So I think makes that potential consideration all the more compelling. I would be remiss not to mention core-fixed income as that means of conventional portfolio balance because while we know it might not protect you from a rise or a re-acceleration in inflation-- I mean, we learned that lesson in 2022 when you had that stock bond correlated sell off-- we do still think that that's going to be a really good defensive ballast if our base case ends up being wrong and you do get a big growth downturn either here in the United States or elsewhere.

So continuing to rely on that, taking a global perspective and looking across the developed world landscape for those opportunities, and especially if you're a US taxpayer, really kind of embracing that relative value that's being seen in the municipal bond market right now, we think is still prudent, particularly if you're looking for places to deploy excess cash.

Yeah, absolutely. I think those are some fantastic considerations. So maybe just let me summarize the key points. Markets have performed exceptionally well over the last two years. And to really ensure that we're harnessing those gains and making our portfolios resilient, I think focusing on income and focusing on real assets are a great way to do that. Is there anything else that you would add?

I would just add that one of the reasons why this is my favorite section in the entire outlook is because while there's so much that we're excited about when we look ahead to 2025 in terms of being front-footed and embracing new opportunities, this is also an opportunity really balance that mindset with one that's focused on that resilience and foundation for long-term financial success.

It should help folks stick to their goals.

Yes.

Absolutely.

Thank you so much for joining us.

Thank you.

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Evolving investment landscapes. Sports and Streaming. Evergreen Alternatives. Reimagined cities. Jay Serpe, Global Head of Alternative Investments Strategy & Business Development.

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All right, we're going to dive into evolving investment landscapes with Jay Serpe. Jay, thank you so much for joining us.

Thanks for having me.

So one of the things that I think is most interesting about alternative investments, in particular, is that it's both the way that we can get access to these new emerging, innovative industries and companies. But it's also the epicenter of financial innovation as well and investing innovation. So why don't we start at the beginning, which is what are the kind of themes and sectors and industries that you're hearing from are the alternative managers that we work with that we're most excited about for 2025?

Yeah, we view alternatives as having a structural role in portfolios. But as you rightly point out, we do view it as one way to capture innovative trends as we always have. In this outlook, you see us discuss that throughout the outlook, tapping private markets or alternatives to invest in themes like AI, life sciences, robotics and automation, defense and cybersecurity.

And that's not new this year. But I do think that 2025 is shaping up to look very interesting for the alternative space. This pro-growth impulse post-election in the US is going to drive a lot of capital markets activity, which looks interesting for private equity investors and in areas like venture capital and growth equity that can capitalize on a higher growth trend in innovative ways that can benefit from great tailwinds, too.

Yeah, it's interesting that kind of dealmaking recovery was already underway because the Fed had stopped raising rates. There was some more liquidity that was coming back to the marketplace, but it does seem like the election results will be the next catalyst that will really take dealmaking to the next leg of its recovery.

We think so. We do think that you'll see an uptick in M&A next year, an uptick in other capital market activity like IPOs, high-yield bond, leveraged loan issuance, all of that should be good for the private equity industry. And so we'll lean into sectors that we like in public and private markets. But we'll also lean into new areas within alternatives, areas like sports and in new types of investment strategies or vehicles like evergreen alternatives to, which we discussed in the outlook.

Yeah. So spend some time talking about sports. It kind of bucked the trend as we've been in this kind of dealmaking ice age for lack of a better term. Sports investment and sports deals actually surged. So what is the thesis behind sports investing and why are all eyes on that space now?

Because the rules have changed about who can invest. Up until a few years ago, it was really just the realm of very rich individuals who could own sports teams or leagues. That's changed.

Now within the last several years, most major sports teams and leagues in the US have changed the rules whereby private equity firms can own part of those different types of organizations. And so you have seen an uptick certainly in volume around dealmaking when it comes to sports.

But I think it's important to keep in mind that sports is not just about mature sports leagues and teams in the US. It's a global phenomenon. And it encompasses a lot more than just what you may typically think about when you think about a sports investment, media rights, ticketing, events at stadiums, stadiums themselves and the area surrounding it.

There's a lot to invest behind. It can be on the equity side. It can be on the credit side. But it's really tough to tap in public markets. And so we think private markets could be an interesting place to find opportunities there.

Yeah, it really does seem like a green field opportunity for investment and even talk of investment in even college athletics, which 5, 10 years ago would have been completely off the table.

And it could be an area that maybe is less correlated to what you typically think about other trends being impacted by more macro concerns too.

Right. And just because of the idea that there's inherent scarcity. There's scarcity in terms of what attracts eyeballs, what attracts viewership. And there's a scarcity of assets that I think is attractive from the private space.

That's right.

The final trend is really this innovation that we're seeing within the alternative investing community. And it's this idea of evergreen alternatives. So can you just describe what evergreen alternatives are first? And then maybe we can talk about some of the pros and cons.

Sure. So investing in an evergreen alternative strategy is investing in a portfolio of companies or investments that tends to reinvest your proceeds for you. It's opposed to what we call a drawdown structure.

Historically, when you were investing in private markets, you'd invest in a drawdown fund whereby a firm would call capital from you over the course of five years, as they made investments. As they sold those investments, they'd return that capital to you over a 5 to 10-year period. It's cumbersome to do that. It requires investors to make decisions every year into things to invest in.

And you have to deal with capital calls and distributions. You have to deal with different tax things at the end of every year. It's complicated. And so the industry has moved in the direction of launching new evergreen strategies.

The greatest benefit is simplicity. You make one investment, and then all of your investments are reinvested for you. You can compound wealth over time, but it does come with some key considerations too. You tend to see fees are modestly higher. You may get a liquidity drag. You may not get liquidity when you really want it. And choice today is really limited.

But that's what's changing. What you've seen in the last 18 months, and we expect to see in 2025, is a significant uptick in the number of managers that are launching evergreen strategies. Greater choice to us means there's a greater opportunity to build portfolios with evergreen solutions, as opposed to just having really limited choice, which has been one of the greatest headwinds so far for the space.

Yeah. And I just want to emphasize, I think, a key point that you made is one of the things that are attractive about evergreen alternatives is that there is the opportunity or the potential for periodic liquidity. But I think what you're alluding to is we've been in this period of more or less a bull market. And there hasn't really been a dislocation in at least the evergreen private equity side, where there might be a real rush for liquidity and a need for liquidity.

So some of these alternative investments are untested in a down market. But I think the pros are that you get invested right away. It's much easier to get to your potential kind of portfolio allocation. And your investments compound a little bit more efficiently over time. Is that fair?

That's fair to say. I think that it will just require a lot of advice and a lot more thought around which strategies make sense for which investors. There's considerations for everyone. To your point, I think any investor looking to allocate to private markets should have a longer time frame, at least 7 to 10 years.

Whether or not they're going into evergreen solutions where they may have temporary or episodic liquidity or in drawdown funds, having a long-term investment horizon is key. But then the mix of evergreen strategies versus drawdown strategies is something where we'll provide a lot more advice to clients in the coming year.

Yeah, and it's certainly becoming more popular for our clients. I mean, this was the first year where 50% of our alternative capital raised was in evergreen structures.

The last thing I wanted to hit on with you is this idea of portfolio resilience, which is a different section of the outlook but I think is very tied to what we do on the alternative side just because of the importance of diversified sources of income or real assets. So just tell me about what's going on in the infrastructure space and the real estate space and why those types of positions could be valuable to investors as we head into 2025.

Yeah, fundamental principles around alternatives are that they should enhance returns or diversify some of the risk that you have in your public portfolio. And you rightly point out a few areas of alternatives, like real estate and infrastructure, that we view as valuable diversifiers in portfolios. It's also pretty timely right now for both of those categories.

Within real estate, you've seen a significant price correction over the last couple of years as prices have reflected higher interest rates. But we view commercial real estate prices as having troughed. And we see really interesting opportunities in areas like industrials and in housing, especially in the US. Within infrastructure, infrastructure is meant to provide resilient cash flow, less correlated returns over time as well.

But the major tailwind right now in the infrastructure space is the need for power. Everyone needs more power fueled by this growth in AI and AI adoption. You need more power generation, power distribution. All of that requires heavy infrastructure investing.

So we're at this rare connection point of advancing the technology with the build in infrastructure that will need to coincide. And it's creating really interesting opportunities for private infrastructure investors heading into next year, too.

Right. It's a great opportunity where we see tremendous growth potential, but you're also getting that portfolio benefit impact, where it at least could provide a little bit of diversification away from stocks and bonds as well. So if I would just recap a little bit of the conversation, we're seeing a recovery in the dealmaking environment, which should be pretty good for the private equity and private credit segments of the marketplace.

Alternatives is a structural area where investors can allocate to growth segments on the market. And we feel excited about the potential opportunities, whether it's AI, technology, health care, et cetera. And then when we think about portfolio construction, alternatives remain a key way where we can add diversified sources of return to portfolio. Is that fair?

And I think the timeliness around the evolution in evergreen is enhancing, in my mind, that portfolio construction conversation because it doesn't have to come with the illiquidity that you've experienced historically.

Absolutely. Jay, thank you so much for the insights.

Thanks so much for having me.

And now we'll be joined for some concluding remarks from our partner, Martin Morron.

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Closing remarks. Martin Marron, CEO, Wealth Management Solutions.

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Thank you, Jake. And sincere thank you to our global investment strategy team for their insights today. As we approach 2025, we view ourselves as being in a position of strength, with potential opportunities on the horizon. Our discussions today have highlighted our key themes focused on global policy issues, accelerating capital investment, understanding election impacts, portfolio resilience, and evolving investment landscapes.

One topic that particularly resonated with me today is the importance of conducting a wealth check to help ensure that your portfolio remains resilient and aligned with your goals. Since 2020, strong equity returns have generated significant wealth for investors, but may have also altered the underlying risk characteristics of their portfolios.

For instance, if you invested in a 60/40 portfolio in 2020 and didn't rebalance, that same portfolio now looks more like an 80/20. This shift presents an opportunity for a strategic reassessment of your portfolio from a position of strength. It's crucial to confirm your objectives, risk tolerances, and preferences, and consider how your current portfolio aligns with those goals.

Please be sure to review our 2025 outlook for a comprehensive view of the topics we've discussed today. I also encourage you to reach out to your J.P. Morgan representative to discuss how these insights can be tailored to you and your family's unique needs and aspirations.

Your trust and faith in J.P. Morgan are the cornerstones of our relationship. And we are honored to stand by your side as your partner in this journey. Thank you once again for your time.

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