In focus - Markets

10-year forecasts: our expectations for returns from the major asset classes

Our forecasts for the next ten years show returns from market indices will continue to undershoot investors’ expectations.

21/03/2019

Riaz Fidahusein

Riaz Fidahusein

Head of Strategic Allocation Modelling, Multi-asset

Keith Wade

Keith Wade

Chief Economist & Strategist

We have developed fresh forecasts for absolute returns across asset classes for the next ten years.

These forecasts suggest that cash returns are likely to remain poor, and indeed look set to be negative in Japan. We forecast the UK to deliver the highest cash returns, though even here the projection is for just 1.1% per annum, less than expected inflation of 2%.

These projections chime with our inescapable truths for the next decade, where we argue that interest rates will remain low, albeit not at the exceptionally low levels of the post financial crisis period.

Turning to fixed income, we do expect sovereign bonds to outperform cash over the next decade but returns are likely to be disappointing, and still negative in Japan. We forecast US Treasuries to return 2.7% p.a. Higher returns can potentially be found in emerging markets, where we see local currency sovereign bonds returning 6.5%.

Our equity market forecasts are based on the rolling excess of annual returns of US equities over US bond yields since 1900, the long run risk premium. This is combined with a valuation measure – the cyclically-adjusted price to earnings ratio, or CAPE. We see global equities returning 6.7% p.a. and emerging market equities 10.0%. The more generous potential return of emerging markets would typically be expected to compensate for greater volatility and sharper drawdowns. For Europe, we expect returns of 5.1% p.a. and for the UK, 4.6%. 

Equities are expected to outperform cash and bonds. However, these forecasts show that there continues to be a gap between the returns stock market indices are likely to deliver, and the returns investors expect. Our 2018 Global Investor Study found that the typical investor was expecting returns of 9.9% p.a. over the following five years. The implication is clear: there will be greater need for active fund managers who can generate alpha – i.e. who can beat the market – in the coming years.

Finally, looking at alternatives, private equity offers the highest returns on our forecasts. 

The PDF below contains the full forecasts and information about the methodology used.