QMA’s Global Multi-Asset Solutions Group shares their ten-year capital market assumptions for the fourth quarter of 2019.
We expect real economic growth in the developed economies to continue to moderate over the next decade, as the developed labor force is constrained by domestic demographics. We anticipate growth to be slowest in Japan and parts of Western Europe, where the labor force is expected to contract further over the next decade. Inflation in developed markets, in contrast, is anticipated to increase modestly over the next 10 years, relative to the low rates of inflation observed since the onset of the global financial crisis of 2008. We expect real economic growth and inflation in emerging markets to advance at higher annualized rates. Younger populations and higher rates of return on capital in emerging markets are driving higher rates of nominal economic output compared to developed markets.
Entering the fourth quarter of 2019, the US economy has grown for 123 months from the end of the last National Bureau of Economic Recession (NBER) recession in June 2009, as has much of the global economy. Whereas this is now the longest postwar US expansion on record, it has also been one of the weakest, if measured by average real GDP growth. Against this backdrop, equity markets have performed strongly, with the MSCI World Index delivering annual returns of 11.1%. US equities have fared even better, with the S&P 500 Index advancing at a 14.5% annualized rate. Over the last 10 years, in contrast, our long-term capital market assumptions for global equities have gradually come down, consistent with the aforementioned moderation in expected developed markets economic growth and richer valuations consequent with the strong performance of equity markets relative to underlying earnings.
Our capital market assumptions for global fixed income assets have also declined broadly over the last 10 years, primarily attributable to historic declines in underlying sovereign interest rates, which have resulted in an estimated $17 trillion in negative-yielding debt, approximating 30% of the Barclays Global Aggregate as of August 31, 2019.
Consistent with historical precedent and assuming the continuation of current dividend taxation regimes, we expect the US equity market to have a large share of expected income returns coming from buybacks, equal to about 1.7% in our long-term forecasts. Outside of the US, the expected impact of net share issuance in developed economies on long-term income returns is anticipated to be a modest drag of 0.2%. For emerging markets, an expected drag on income returns from net share issuance is forecast at 0.7%.
After a strong quarter in which both US and global REITs gained more than 6.0%, valuations are judged to be somewhat elevated relative to longer-term expectations, resulting in a negative valuation adjustment for both, as well as adjusting for lower forecast dividend yields. Our long-run forecasts for US and global REITs are 5.4% and 5.7%, respectively. This represents a decline from forecast returns of greater than 8% for both US and global REITS at the end of 2018, when valuation adjustments contributed positively to expected returns.
Our long-run expected return for commodities is 3.1%, reflecting a return on cash investment of 2.1%, assuming investment through liquid futures, and a growth premium of 1.0%, consistent with historical spot returns over cash. This forecast represents a decrease of 20 basis points from the end of the second quarter, primarily attributable to a decrease in the longer-run expected return to cash.
Our long-term forecasts for currency returns and returns to currency hedging are based on our forward views of local relative price levels and short-term policy rates. These views allow us to provide our long-term forecasts for a range of domiciles outside the US. Over the next 10 years, we are forecasting the US dollar to decline modestly relative to developed market peers, with annualized forecast gains ranging from 0.1% for the euro to 0.9% for the Japanese yen. Emerging market currencies, in contrast, are expected to depreciate against the US dollar over the next 10 years. With short-term interest rates in the US expected to be higher over the long term than in other developed markets, long-term currency hedging returns in developed markets are forecast to be positive for US investors.
NOTES TO DISCLOSURE
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The comments, opinions and estimates contained herein are based on and/or derived from publicly available information from sources that QMA believes to be reliable. We do not guarantee the accuracy of such sources of information and have no obligation to provide updates or changes to these materials. This material is for informational purposes and sets forth our views as of the date of this presentation. The underlying assumptions and our views are subject to change.