30-year asset class returns forecast: 2017 update

Craig Botham

Craig Botham

Senior Emerging Markets Economist

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Our forecasts suggest that the long-run real returns on cash will be extremely poor, with negative returns on offer in Japan. The US and some Asian markets do offer a positive return, but even risk-averse investors might shy away from a maximum return of 0.7% per annum.

We would expect longer-dated sovereign debt to outperform cash over 30 years, but returns in real terms are still likely to be disappointing, and Japan still fails to deliver a positive return. The current valuations of bonds considered “safe assets” are unattractive and suggest low returns, despite a recent increase in yields.

Of the riskier assets, we expect credit, property and equities to outperform sovereign bonds, though some credit investors will likely prefer the US market, as investment grade credit in the UK and Europe is set to underperform Treasuries.

Equities remain the asset class offering the greatest potential for returns. On a regional basis, we believe most equities will deliver an attractive return (both real and nominal), though in the US there is not much difference in return between credit and equities. UK small cap equities, followed by emerging markets and Pacific ex Japan, offer the highest returns.

Emerging market equities, however, are more prone to periods of crisis than their developed peers, and we would expect the more generous potential return to compensate for greater volatility and sharper drawdowns.

Elsewhere, equity returns are again lowest in Japan, thanks to a sub-par dividend yield in comparison with its peers. Meanwhile, the deflationary environment explains the relative underperformance of both the Japanese cash and government bond (JGB) markets.

Our full in-depth analysis can be found as a PDF at the link below.