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Expected returns lower over next five years

investment returns five years

Investment returns will likely be below historical averages for the next five years due to a number of global economic and political factors.

Investment returns are likely to remain below long-term averages for around five years with the best prospects for returns coming from US dollar-based investments, according to global asset manager Robeco.

At the same time, inflation will remain in the 2.5 per cent to 5 per cent range for developed countries, putting pressure on portfolio diversification as returns from stocks and bonds more closely correlate in this range, the company said in its twelfth annual “Expected Returns” report, which covers 2023 to 2027.

The report said the next five years would be “the age of confusion” due to the unpredictably of markets, stemming from energy and food crises, double-digit inflation in developed countries and China being the largest contributor to global growth.

“The continued pandemic-related fiscal stimulus, supply chain problems and the Russia-Ukraine war have contributed to unexpectedly high inflation over the past year,” Robeco stated.

“Accordingly, we expect asset returns to remain below their long-term historical averages over the coming five years, mainly due to the low risk-free rate.

“It’s worth noting that the expected equity risk premium of 3 per cent, for the first time in the 12-year history of the “Expected Returns” publication, will be below its long-term average of 3.5 per cent.

“For US dollar-based investors with an international portfolio, perspectives are rosier as other currencies are expected to appreciate against the US dollar, with the US dollar bull market coming to an end in the next five years.

“We expect asset returns in euro to remain below their long-term historical averages over the coming five years, mainly due to the below steady state risk-free rate and, in some cases, subdued risk premiums, except for commodities.

“Maintaining real purchasing power for a globally diversified portfolio will be daunting as we find that a globally diversified portfolio of stocks and bonds has a real, that is, inflation-adjusted, return of -2.9 per cent per annum when annual inflation is above 4 per cent per annum. In other words, inflationary periods are by far the worst when it comes to investors’ purchasing power.

“With the exception of our bull-case scenario, we see inflation in the 2.5 per cent to 5 per cent bracket for developed economies and this clearly also challenges portfolio diversification as the stock-bond correlation tends to be positive in this inflation range for developed markets.

“The quest for alternative assets to hedge equity risk will therefore continue.”

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