Economic Views

Seven-year asset class forecast returns: 2015 update

According to the Schroders Economics team's latest analysis, investors looking for positive real returns over the next seven years should look to equity, credit and alternatives. 

05/08/2015

Craig Botham

Craig Botham

Emerging Markets Economist

Running the risk of higher returns

Pacific ex Japan equities likely promise the highest real returns, followed closely by emerging market equities, though this higher return comes with higher risk, and could be undermined by currency moves.

Methodology

Our seven-year returns forecast builds on the same methodology which has been applied in previous years, as explained in the appendix to this document (found in full at the foot of this page); and has been updated in line with current market conditions and changes to the forecasts provided by the Global Economics team. The document compares our current return forecasts to those last published in July 2014.

Summary

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

Note the generally negative real returns for cash and bonds, against (in some cases extremely) positive real equity returns.

Most credit and alternative investments should also provide positive returns after inflation. Pacific ex Japan equities offer the highest real returns of any asset.

Macro outlook

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

We have downgraded our short-term growth forecasts for the US to reflect a more pessimistic outlook for labour force and productivity growth.

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

After deflationary pressure from a slowing Chinese economy and softer commodity prices, a lack of reform in a number of major emerging market economies has created supply side bottlenecks and contributed to a persistence of inflation.

Emerging market economies will have to implement structural reform to tackle their inflation problem, notably Brazil.

Japanese inflation has been revised up on the impact of Abenomics, while cheaper oil and commodities have led to downward revisions in the rest of developed markets.