Summary
Mid-year update on expected returns across asset classes over a 5- and 10-year horizon.
Key points
Improved growth/inflation mix: Our long-term model assumptions anticipate a fragmented and even more delayed energy transition, incorporating secular trends and uncertainties that impact price dynamics and volatility. Compared to last year, the growth/inflation outlook appears less penalised by a restrictive regulatory framework around the energy transition, but the uncertainty around inflation has increased. This heightened inflation uncertainty is likely to influence asset class behaviour, particularly increasing bond market volatility – our annual publication describes the macroeconomic outlook in more detail.
Update on valuations: Despite the heightened noise from the new era of tariffs and recent strong market movements, current market sentiment has shifted to a cautious ‘wait and see’ stance. There is unanimous agreement that uncertainty going forward has increased. Returns should be driven by moderate earnings growth alongside declining valuation multiples. Valuations have only marginally adjusted: the US has improved in relative terms, while Europe and Pacific ex-Japan have weakened, reducing the expected advantage over the US. Emerging Markets’ aggregate returns have shifted lower, with China being the primary driver. US government yields have converged downwards to our estimated equilibrium levels, implying lower expectations for the US Fixed Income return. Conversely, other core Developed Markets bond yields edged higher. Credit spreads remain expensive, reducing any potential gain generated by government yield movements.
Risk-return trade-off: The slope of the capital market line (CML) has decreased slightly due to lower expected returns for risky assets, remaining relatively flat compared to historical norms. Alternatives continue to be an attractive allocation option for generating higher returns, while fixed income remains a fundamental building block in multi-asset portfolios.
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