Investors shift back to bonds as cost of capital returns

Dubai: J.P. Morgan expects bonds to deliver meaningful real returns for the first time in more than a decade, while equities remain positioned for high single-digit gains, as a higher-rate world and a wave of AI-driven investment redefine long-term market assumptions.

In its latest Long-Term Capital Market Assumptions, the bank says investors are shifting away from a liquidity-driven era into a cycle shaped by higher funding costs, government-led industrial policy and sustained technology spending.

The report identifies three structural forces that will drive portfolios in the coming decade: economic nationalism, fiscal intervention and widespread adoption of automation and artificial intelligence. The combination, it argues, marks a break from the post-crisis period of near-zero rates and global policy alignment.

With policy rates no longer pinned to the floor, high-quality fixed income is set to play a central role again. J.P. Morgan sees a steepening in government bond curves and attractive carry in investment-grade credit, allowing diversified portfolios to generate income without excessive risk.

Equities remain constructive, supported by earnings power and long-term productivity improvements tied to technology. But the bank notes that market leadership will broaden only as earnings cycles normalise and capital becomes more discerning.

AI is presented as a real-economy investment story rather than a market slogan. “Technology capex, particularly for artificial intelligence and automation, will become more crucial to sustaining long-term growth,” the report states. Productivity gains are expected, but only after years of infrastructure investment, talent build-out and operational integration.

The outlook points to a sustained role for governments in shaping industrial capacity, energy systems and strategic manufacturing. That approach, paired with more fragmented global supply chains, suggests regional investment blocs will matter more than global uniformity.

A gradually weaker US dollar is also anticipated as growth disperses and capital flows diversify, improving the long-term case for select emerging markets.

Overall, the bank argues the coming decade will reward fundamentals: pricing power, governance, efficient capital use and selective risk-taking. Bonds act as income engines again. Equities benefit from technology and productivity, not policy support. Private markets face a higher bar for transparency and returns.