Forecasting the Next Decade: Navigating Uncharted Waters
May 2020 - 32 min read
Barings Multi Asset Group combines the underlying factors that will drive markets over the long term with today’s valuations to produce total return forecasts for major asset classes over the next ten years.
Highlights From Our Multi Asset 10-year Forecasts
- The COVID-19 crisis has disrupted markets, leaving the valuations of many riskier assets more attractive than they have been for years. One of the key advantages of taking a long-term approach to analyzing economies and markets is the ability to step away from the eye of the storm and consider the longer-term outlook. This framework does just that.
- Beyond the current disruption, consensus estimates of long-term trends in economic growth are generally too low, in our view. The evidence is that debt and demographics do not necessarily drag growth down. We expect real economic growth will remain decent—though far from stellar. Inflation looks to be structurally lower than in previous cycles.
- Some of the asset classes with higher return forecasts are to be found within credit. Global equities should deliver mid-single digit annualized returns from here, albeit at higher levels of volatility compared to credit markets.
- We have added forecasts for more exotic areas of credit, such as mezzanine CLOs, to our 10-year framework for the first time. For those with the risk tolerance, we believe these areas offer compelling investment opportunities.
- Sustainability is key. Our return projections naturally dilute equity and bond returns for countries with less sustainable practices such as environment degradation or high levels of CO2 emissions.
- Investors will need to be more dynamic and selective about asset classes. Over the past 30 years, a traditional balanced strategy delivered an annual return of around 8% per annum. For the next ten years, a static balanced portfolio will most likely deliver not more than 3.6% per annum.
- Typically, we would prepare this analysis as of March 31 each year. However, in light of the exceptional market moves in the latter stages of March 2020, this year we have run our numbers as of April 30 instead.