Investors brace for big drops in cruel world of rich assets
23 Oct 2017 - 0:11
By Sid Verma & Cormac Mullen / Bloomberg
Investors worldwide face a grim dawn of low returns across debt and equity markets as early as next year, with rich valuations and feeble growth seen pushing gains below historic norms.
That’s the alarm sounded this week from the likes of Morgan Stanley, GAM Holding AG and Grantham Mayo Van Otterloo & Co.
Relentless monetary stimulus and positive growth momentum have juiced stock and bond prices across global markets to record levels over the past eight years -- a feat that likely can’t be repeated.
Here we survey the darkening investment landscape painted by banks and asset managers.
The value investor, with $77 billion of assets, issued bearish projections Monday: gear up for negative returns across most asset classes adjusted for inflation for the next seven years, with emerging-market stocks offering the main source of positive gains. U.S. stocks, for example, have posted a 14.3 percent annualized return over the last five years -- GMO projects a 4 percent annual decline for U.S. large-cap stocks over the next seven years.
Investors are keeping the faith despite rich valuations. Equity funds received a cool $8.8 billion in the week to Oct. 18, according to Bank of America Corp., citing EPFR data, spurred by exuberance towards U.S. stocks.
There’s one quantum of solace: Jeremy Grantham’s firm projects U.S. inflation will return to its long-term average, suggesting that if weak core prices endure, the bar for real returns will be lowered.
From sovereign-wealth funds, endowment trusts to pension managers buckling under the weight of unfunded liabilities in the trillions, investors of all stripes will be compelled to snap up alternative and emerging-market assets in order to juice profits after inflation.
That’s the take-away from Morgan Stanley strategists this week, who forecast a 60/40 equity-bond portfolio split will deliver 4.2 percent per year in dollar terms and 4.7 percent in euros over the next decade -- lows not seen since the early 2000s.
“Returns are increasingly hard to achieve without taking on a lot more risk across asset classes thanks to the "compression in risk premiums and lower rates," analysts including Andrew Sheets wrote in a report.
Goldman Sachs Group Inc.
And the cloudy outlook for investors could come sooner than you think.
Goldman Sachs projects losses over the next 12 months across U.S. stocks, rate and credit markets and all commodities except oil, suggesting investors will take a breather after this year’s rally that has spurred fears over ’bubblicious’ valuations against the backdrop of still-modest growth.
"Days are numbered for the multi-asset trinity of positive correlation, high return and low volatility," warns Larry Hatheway, group chief economist. Bond investors will be lucky to post half the returns achieved on average since 2009. And even if debt obligations rally from here -- on weaker growth and falling inflation -- it will be a nightmare for equities at prevailing valuations, he wrote in a Bloomberg View column.
Hatheway isn’t alone in his diversify-or-be-damned warning: investors wedded to the traditional stock-bond portfolio split in developed markets are set to deliver inflation-adjusted returns of just 1 percent per year over the next five, according to Pictet Asset Management.
RBC Global Asset Management
Just a small uptick in yields would spur negative total returns across developed sovereign bonds markets, according to the asset manager’s outlook for the next 12 months. Prospective returns for equities are naturally far better -- but the valuation tailwind from falling rates may be exhausted and a rise in the discount rate would crimp their relative value.
A well-diversified portfolio will boost weighted returns, with equities set to outperform, according to Robeco. The global recovery still has legs but there’s now a greater prospect of a mild recession against the backdrop of quantitative tightening, according to the Dutch asset manager.
“On balance, we have lowered our outlook for most assets, and expect to see more volatility ahead,” said Lukas Daalder, chief investment officer for investment solutions, in a note last month.