Unsurprisingly, Barings sees a decade of low interest rates as some key central banks continue their quantitative easing policies. Bond yields will rise only slightly.
Over a ten-year horizon, Barings believes equities will be the best performing asset class. Investors will increasingly turn to dividend-paying companies in order to get the yield that bonds cannot provide.
“Growing dividend yields should prove attractive in a yield-starved world, and while valuations are already high today, it is possible they will be pushed even higher.”
Equities in the UK, Japan and to an extent emerging markets are expected to perform comparatively better than their counterparts in other geographies over the next decade.
“The US, having performed very strongly over the past several years, is likely to fare more modestly over the same time horizon. With profit margins already at cyclical highs, US companies may see mild margin erosion as interest rates rise.”
The forecast also sees modest global growth. “Demographics will continue to be a drag on growth, as developed market populations age. Productivity growth is also slowing in a number of advanced economies, while credit regulation, a major consequence of the global financial crisis, will constrain investment.”
A decade is a long time
A ten-year investment forecast is a very ambitious call. Technological advances, increasing global integration and unpredictible geopolitics are some key disruptors of even the best analysis.
Barings, however, looked at its 10-year forecast from 2004, compared it with actual market returns, and found that it was, by and large, fairly accurate.
The firm’s 2004 10-year forecast predicted that emerging market equities would deliver the highest returns in the asset class at just over 10% annually.
“As it happened, emerging equities returned 10.3%. We forecast Japanese equities to perform the worst of all the major markets. Property was also expected to outperform bonds. All of these predictions have been broadly correct.”
However, because the global financial crisis was not in the forecast back in 2004, some predictions missed the mark.
"In 2004 we did not expect cash rates to go to near zero, nor for UK inflation to jump up sharply between 2009 and 2011. Both of these errors are related to the extreme impact of the 2008 crisis. Our expected bond returns were also too low – an error related to the zero cash rates currently seen around the world."
Another long-dated forecast by the Economic Intelligence Unit looked strictly at broad macro trends and not the impact on asset classes.
The research house said Asia is expected to reach 45% of global GDP in around a decade compared to 32% today.
And by 2050 – if it’s reasonable to predict that far ahead – Asia is forecast to make up 53% of the world’s GDP.
Source: Economist Intelligence Unit