From BlackRock, Jul 25, 2016:
We have lowered many of our capital market assumptions in our latest quarterly update. We now assume lower U.S.-dollar returns from most asset classes over the next five years, following a fall in both yields and global growth expectations.
- We have lowered our five-year return assumptions for most asset classes, on a fall in yields and global growth expectations.
- The S&P 500 reached a new high last week, as many large-cap U.S. companies reported revenues above analysts’ expectations.
- We see the Federal Reserve (Fed) on hold this week, while the Bank of Japan (BoJ) may delay actions until September.
Our five-year return assumptions have steadily moved lower since the financial crisis, amid weak global growth prospects, easy monetary policy and rising valuations. Most are now well below long-run averages.
Uncovering relatively higher returns We have lowered our assumed returns for most fixed income assets, following a drop in yields (and rise in valuations) in the second quarter. We see holders of long-duration U.S. Treasuries losing more than 1% annually over the next five years as yields rise. Our analysis also shows less than 10% of the global fixed income universe offering annual returns of 3% or more over the next five years, with the higher returns concentrated in riskier assets such as hard-currency emerging market (EM) debt and high yield. We view EM debt as especially attractive versus Treasuries over the next five years.HT: Barron's Income Investing
Our return assumptions for U.S. stocks are unchanged — but are low from a historical perspective due to high valuations (the U.S. market is currently trading near 19 times earnings). We see non-U.S. equities offering higher potential returns, along with higher risk. We have, however, downgraded our return assumptions for pan-European stocks due to the likely impact of a Brexit on UK and eurozone economic growth. To generate higher returns, investors must be ready to accept more market risk or more illiquidity risk (e.g. alternatives). Within riskier assets, EM debt and dividend growth are worth considering. Government bonds can still play an important diversification role in portfolios — but at a greater cost. We see investment grade credit offering attractive risk-adjusted returns for investors looking for safety....MORE
Related: Tuesday's FT Alphaville "A friendly reminder that return is 'not really a function of yield'".