Key takeaways:
- Markets are constantly evolving and what once was true may no longer be. Understanding why and when a forecast has worked is an essential part for informed portfolio construction.
- Long-term expected returns still seem attractive. Within fixed income, yields remain high, while for equities, valuations look attractive outside the US, although the gap has narrowed versus previous years.
- We expect this environment to have various implications across portfolios, with ramifications for asset class diversification.
In this document, the team sets out their expected longer-term returns for 20 major asset classes across equity, fixed income, currencies and commodities. It covers the implication of these forecasts for each asset class. Forecasting asset class returns over an average market cycle, taken to be around 10 years, helps both to frame shorter-term investment views and to construct the longer-term foundations of a portfolio.
The focus covers the major asset classes, but the same methodologies could be applied to a broader range of asset classes and currencies, built on model-based expectations for expected returns that are transparent and easily understood.
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IMPORTANT INFORMATION
Equity securities are subject to risks including market risk. Returns will fluctuate in response to issuer, political and economic developments.
Fixed income securities are subject to interest rate, inflation, credit and default risk. As interest rates rise, bond prices usually fall, and vice versa. High-yield bonds, or “junk” bonds, involve a greater risk of default and price volatility.
Smaller capitalization securities may be less stable and more susceptible to adverse developments, and may be more volatile and less liquid than larger capitalization securities.
Sovereign debt securities (eg. government bonds) are subject to the additional risk that, under some political, diplomatic, social or economic circumstances, some developing countries that issue lower quality debt securities may be unable or unwilling to make principal or interest payments as they come due.
