What’s driven upgrades to our long-term return forecasts?

We quantify the investment impacts of the big economic and market changes which have occurred in the past year.



Tina Fong
Irene Lauro
Environmental Economist

Much has changed in the world since we last compiled our 30-year return forecasts. The healthy presence of upgrades versus last year in the table below (indicated by the green cells) show how these changes have generally been positive for long-term asset returns.

It’s perhaps unsurprising that higher near-term inflation has tracked through into marginally higher nominal returns for the majority of asset classes. But real return forecasts, adjusting for inflation, are also higher.

Many of the upgrades to fixed income assets including cash and bonds (government and corporate bonds in the credit market) reflect a shift in the closing months of 2021. This shift occurred as the major central banks inched towards “normalising” interest rates.

Clear direction of travel on climate change

Climate change was very much in the headlines last year, not least with the 26th United Nations annual climate gathering, or conference of parties (COP) in Glasgow, UK.  

Many fossil fuels are going to need to remain in the ground. Leaving these assets stranded is necessary if the world has any hope of meeting climate targets and heading off unchecked global warming, research from the International Energy Agency clearly tells us.

We already incorporate the impact of stranded assets, along with the other physical impacts of rising world temperatures, and efforts underway to mitigate them. We anticipate the worst impacts will be avoided, although not to the extent possible by limiting warming to 1.5 degrees, which requires a target of net zero greenhouse gas emissions to be met by 2050.

Last summer’s Intergovernmental Panel on Climate Change’s (IPCC) landmark report reminded us that this ambition, agreed at COP 21 in Paris seven years ago, remains within reach. However, it will require substantial transformational change.


As Covid-19 has disrupted supply chains and driven up inflation, the major central banks have signalled a shift away from the emergency pandemic monetary policy settings. This includes the so-called normalisation of interest rates.

The Bank of England has been the first G7 central bank to hike rates since the pandemic; we expect the US Federal Reserve to follow suit shortly.

China driving emerging market upgrades

This is positive for real returns on fixed-income assets versus last year (see top sections of the table). The reasons for the upgrades in equity returns (see bottom section of table) are perhaps less intuitive. Global equities, after all, have performed very strongly following news of successful Covid-19 vaccines in November 2020.

But not all equity markets have performed well, as we’ve seen with China.

A zero tolerance approach to Covid has resulted in acute supply chain pressures (compounded by floods and energy shortages) which has constrained economic activity.

Difficulties facing China’s (economically crucial) property sector and uncertainty around potential implications of President Xi Jinping’s “common prosperity” policy goal have also weighed on the stock market.

Valuations matter to our return forecasts in that they impact initial dividend yields. These initial yields, together with the expected growth rate of dividends, constitute a key building block for equity returns. In this regard, China’s recent challenges are a positive for long-term returns.

Higher initial dividend yields suggest a more favourable real returns profile for Chinese equities, which has driven our upgrade for emerging market (EM) equities overall.

We now expect EM equities to return 7.4% per annum (p.a.) over the next three decades, compared to 5.4% p.a. from developed equity markets, the latter unchanged on 2021.

The uneven effects of climate change

It became very clear from our previous analysis that many EM economies are disadvantaged by climate change, not least due to the impact of writing down the value of stranded assets. Although such impacts are not sufficiently large that we expect EM to underperform developed markets.

Soaring energy prices in 2021, particularly in Europe, have added a new dimension to efforts to mitigate our reliance on fossil fuels and shift to renewable energy sources.

Here our estimates will provide a consistent framework for assessing the potential consequence of such developments should, say, they impact investment in low-carbon electricity generation and energy efficiency.

These could be potential positives for economic growth, earnings, the growth rate of dividends, so positive for equity returns in particular.

See here for details of our latest long-term returns forecasts.

See here on how we incorporate the effects of climate change.

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Tina Fong
Irene Lauro
Environmental Economist


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