Returns will likely fall over the next decade

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The latest edition of Horizon is out, containing Pictet Wealth Management’s updated secular outlook and expected returns for the main asset classes over the next 10 years.Some of the highlights are as follows:

Expected Returns

  • Equities: below long-term average but still attractive. Our models suggest that global equities can be expected to post a 6% return in US dollars annually for the next 10 years. Such returns look attractive relative to long-term sovereign bonds, but are markedly lower than the 8.6% average long-term annual return of the S&P 500.
  • Government bonds: the bonanza is over. It looks unlikely that bonds will post meaningful positive returns over the next few years. At best, according to our models, 10-year US sovereign bonds can be expected to return 1.2% on average per year over the next 10 years, while 10-year government bonds in the euro area, Switzerland and Japan will deliver negative returns.
  • Corporate bonds: the hunt for yield continues. According to our in-house models, euro investment-grade (IG) corporate bonds can be expected to post positive returns of the order of 1.3% annually over the next 10 years, while US dollar IG returns will average 3.2%. USD high yield (HY) can be expected to post equity-like returns of 5.5% annually, compared with 3.5% for euro HY. These expectations suppose loss and recovery ratios in line with historical averages.
  • Alternatives: Harvesting the liquidity premium. Our models expect a more modest average annual return for hedge funds over the next 10 years, of the order of just over 4% (in USD). But this asset class is far from homogeneous, with a huge dispersal in expected returns between different strategies.
  • Cash: don’t dump it! The gradual increase in short-term rates should translate into a slightly positive return for cash in the next 10 years everywhere. In a low-growth, low-return environment, US cash should offer a decent return of slightly above 2% annually for the next 10 years.

Secular Outlook

  • Our core assumption remains that we will see policy normalisation everywhere, with a gradual increase in base rates in the coming years, led by the Fed. But the key issue in forecasting how central bank policy evolves will be the interplay between monetary and fiscal policy, with the separation between the two already sometimes blurred
  • A painfully slow ‘normalisation’ of growth and inflation will likely continue for the next three to five years, with some idiosyncratic upside risks, mostly in the US and China.
  • We are convinced that another innovation shock is in the making. Although its truly transformative effects are still mostly concentrated in specific sectors, we are close to a much wider propagation of this shock, which looks set to fundamentally alter the very nature of economies.