Seven-year asset class forecast returns: 2016 update

Equities and alternatives are predicted to deliver the most attractive real returns over the next seven years.

10 August 2016

Craig Botham

Craig Botham

Emerging Markets Economist

Our seven-year returns forecast largely builds on the same methodology that has been applied in previous years, as explained in the appendix to this document; and has been updated in line with current market conditions and changes to the forecasts provided by the Global Economics team.

This document compares our current return forecasts to those last published in July 2015.

One key change this year has been an overhaul of our methodology for equity returns forecasting to better capture changing trends in earnings performance, which is explained in greater detail in the appendix.

However, as a result equity returns are not readily comparable between this year and previous years.

Summary

The table below summarises our asset class forecasts for the next seven years.

  • Cash and bonds now universally offer a negative real return, while all equity markets bar the UK offer positive returns.
  • Credit markets find it difficult to escape the pull of negative rates in bonds and cash, but still offer some small inflation-adjusted gains.
  • Alternative assets look to be the next most attractive asset category after equities, but in generally it looks like Asian (Japan, emerging markets, but especially Pacific ex Japan) equities are the best bet.

Macroeconomic outlook

Our overall growth forecast for the next seven years shows a recovery in the world economy, although one that is sub-par by past standards.

We have again downgraded our short-term growth forecasts for the US to reflect a more pessimistic outlook for labour force and productivity growth, and some impact from the UK referendum vote.

Demographics are expected to weigh on the participation rate, and we do not see productivity growth returning to pre-crisis rates.

Inflation too has been revised lower, outside of the eurozone. Inflation in the emerging markets (EM) has seen the largest downgrade, driven by markets like Brazil and Russia where inflation is dropping from very high levels in 2015.

Beyond EM, the fall is driven mainly by the weaker growth outlook and in Japan by the apparent failure of monetary policy as negative rates backfire. Higher eurozone inflation results chiefly from a weaker euro.

Please find the full analysis of asset class returns at the link below.

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