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This short summary of our Long-Term Return Expectations sets out the Multi Asset Team’s views, as at 30 June 2020, on the prospective returns for asset classes over the next 10 years and beyond.
The first half of 2020 was a dramatic and unusual six months. Financial markets saw significant volatility with many suffering substantial drawdowns in the first three months, only to recover most of the losses back in the second three months. Behind that volatility has been the emergence of a global pandemic, coronavirus (Covid-19), which in addition to the high human cost, has resulted in a significant, unexpected hit to global growth, employment and confidence. At the time of writing, it is unclear how this event will develop, albeit that we are optimistic that a set of medical and policy solutions will be found to allow the vast majority of the next decade to be more ‘normal’.
Our central economic case continues to be one of moderate global growth. Beyond the immediate impact of the coronavirus pandemic, higher debt levels and an anti-globalisation trend (most visible in the continuing disagreements between the US and China) are just two potential threats. However, while these will garner plenty of attention in the financial media and may affect economic activity in the short term by weighing on confidence, our central expectation is that these issues will ultimately be resolved and that the global economy will return to trend growth in the medium term, supported by very easy monetary and fiscal policy. As it does so, we expect inflation rates gradually to move up towards central bank targets.
While there have been some substantial changes in expected returns for asset classes, what is perhaps most noteworthy about the current environment is the increased level of dispersion and differentiation amongst regions, sectors and instruments within asset classes. This increases the potential returns available from astute active management and from sector and regional selection.
Our Long–Term Return Expectations
Expected returns for cash*: 1.25% over next 10 years, 2.00% over the long term.*
*UK Bank of England.
Note: Baillie Gifford estimates for asset class returns as at 30 June 2020. Expected returns are passive and do not take into account potential alpha. We view these return estimates as broadly sensible indications of likely returns. They should not be interpreted as high precision forecasts nor are they likely to bear much resemblance to returns over shorter time horizons.
Unsurprisingly, given the dramatic rethink of how we work and interact with one another in the wake of the emerging coronavirus pandemic, one of the most notable changes this year has been an acceleration of the shift towards an online economy. For example, bonds associated with traditional energy, hospitality and travel, and discretionary physical retail industries have generally been marked down and in some cases defaulted, whereas those associated with ecommerce and technology have often done very well. The same trends have been seen within equities, reflecting both the specific disruption to international travel and domestic retail resulting from lockdown policies and the resultant surge in online shopping and consumption of home content and media streaming.
In the shorter term, the pandemic is resulting in a substantial rise in unemployment and spare capacity in the international economy. This is expected to lead to a hit to growth and inflation and, by consequence, much lower policy rates than we would have previously predicted. This has impacted on a number of asset classes.
For example, we now expect lower negative returns from developed market government bonds and positive returns from investment grade credit. High yield credit and emerging market hard currency bonds, which are both priced by risk-free yields plus a spread, benefit both from expected lower government bond yields and elevated levels of spread, with the result that our expectations for both have moved to more attractive levels over cash. For example, we now project that high yield bonds will bear an excess return over cash of 2.25% p.a., up from 0.25% p.a. in December 2019.
Infrastructure and real estate are both fundamentally yield-based asset classes, and both also benefit from a lower long-term yield environment. Indeed, we now see infrastructure as offering similar returns to listed equities on a passive basis – at 5% p.a. over cash for the next decade. That increased return reflects not just yields but also the attractions of infrastructure in a world where fiscal stimulus is more prominent. Many governments will choose to deliver that stimulus through investment in infrastructure projects, which typically carry high economic multipliers.
The views expressed in this article are those of Baillie Gifford’s Multi Asset Team and should not be considered as advice or a recommendation to buy, sell or hold a particular investment. They reflect personal opinion and should not be taken as statements of fact nor should any reliance be placed on them when making investment decisions.
This communication was produced and approved in the second half of 2020 and has not been updated subsequently. It represents views held at the time of writing and may not reflect current thinking.
All investment strategies have the potential for profit and loss, your or your clients’ capital may be at risk. Past performance is not a guide to future returns.
Any stock examples and images used in this article are not intended to represent recommendations to buy or sell, neither is it implied that they will prove profitable in the future. It is not known whether they will feature in any future portfolio produced by us. Any individual examples will represent only a small part of the overall portfolio and are inserted purely to help illustrate our investment style.
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All information is sourced from Baillie Gifford & Co and is current unless otherwise stated.
The images used in this article are for illustrative purposes only.
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