MULTI ASSET LONG-TERM RETURN EXPECTATIONS
All investment strategies have the potential for profit and loss, your or your clients’ capital may be at risk
The Multi Asset Team regularly updates its views on the prospective returns from a variety of asset classes over the next 10 years and the long term. This is a short summary of our expectations as at 31 December 2020.
At the time of our previous note in June 2020, valuations were extremely attractive. Most assets have generally performed well since then and, as a result, our current returns expectations are now lower.
The global pandemic has created much uncertainty in markets and it seems that trends we had previously identified, such as consuming, working and socialising online, have gathered pace.
With the rollout of several vaccines, and the deployment of accommodative fiscal and monetary policies, we expect economic growth to recover over the medium-term. Ultimately, the speed of recovery will depend many different factors, but the efficacy of these vaccines, the pace at which they are delivered and the possible economic impact of further waves of the virus will remain crucial.
Central banks and governments continue to have a role to play to limit near-term damage and help stimulate a faster recovery to pre-Covid output levels. A structurally high level of fiscal spending facilitated by easy monetary policies will lead to strong growth, though this will be accompanied by an increased risk of higher inflation.
The interplay of all these factors increases the possibility of errors in any forecasts made today. So, while we project central expectations for growth and inflation, alongside the expectations for individual asset classes, even more than usual we emphasise that these sit within wide ranges.
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 31 December 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.
Overall, 2020 was an unusual year, with significant changes in how we interacted socially, where we worked and how we shopped. The scale of the coronavirus pandemic and the ongoing social and economic restrictions have put many economies in deep recession. Globally, economic growth is likely to decline by 4 per cent in 2020 but with some divergence between regions and countries, depending on economic structure and the level of restrictions. China has controlled the pandemic better and is leading the recovery whereas UK and Europe have been more severely hit.
Despite the heightened volatility in the first three months of the year, which occasioned significant capital losses, and the Covid-19 induced recession, financial markets performed well in 2020. Most asset classes delivered positive returns; in some cases double digit returns. This was possible, in large part, because of the swift and unprecedented fiscal and monetary policy response to offset the economic damage from the pandemic. Financial conditions have become extremely accommodative, as central banks have cut interest rates and rolled out sizeable quantitative easing measures. Governments have also provided support to households and businesses through furlough schemes and direct payment, loan guarantees and other stimulatory spending and tax policy measures.
One of the economic scars from the pandemic is a significant output gap, with high levels of unemployment and unused capacity. We believe it might take 3-5 years before economies return to full employment or pre-Covid trend growth. This should keep inflation pressures subdued, leading to a slower pace in interest rate increases particularly as central banks are now open to allow inflation to exceed their targets in the short-to-medium-term. We continue to believe that debt overhang, excessive savings and poor demographics will affect long term economic growth. However, the policy responses during the pandemic has resurrected discussions and led to a more favourable view about government’s role in demand management. A structurally higher level of fiscal spending, facilitated by central banks’ policies, could improve long-term growth and also might lead to higher inflation. Partly because of this, whilst our central expectation is subdued inflation, the range of inflation outcomes could be considerably wider.
Finally, the recent improvement in financial market sentiment has clearly been helped by the announcement and ongoing deployment of several vaccines. With this, the path to eventual exit from the pandemic and associated mobility restrictions has become clearer. A timely resolution of the pandemic will not only ensure near-term economic recovery but also limit any long-term damages to businesses and economies. Cyclical companies, such as those in the travel and leisure industries that have been significantly impacted by the pandemic, should now be able to sustainably recover. The outcome of the U.S. election has also excited investors. Beyond the near-term bigger fiscal spending, the tight senate race means that we are unlikely to see radical tax policy measures but rather a unified government will have the space to engineer a much stronger post-recession recovery. All of these should lead to strong medium-term growth.
Relative to our return expectations in June 2020, when valuations were extremely attractive, our current returns expectations are generally lower across our opportunity set, following strong performance over recent months.
Below is a summary of our views on some of the asset classes in which we invest. Please read our full report for a more comprehensive description of our Long-Term Return Expectations across a wider range of assets.
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.
Potential for Profit and Loss
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.
This article contains information on investments which does not constitute independent research. Accordingly, it is not subject to the protections afforded to independent research and Baillie Gifford and its staff may have dealt in the investments concerned.
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.
Baillie Gifford & Co and Baillie Gifford & Co Limited are authorised and regulated by the Financial Conduct Authority (FCA). Baillie Gifford & Co Limited is an Authorised Corporate Director of OEICs.
Baillie Gifford Overseas Limited provides investment management and advisory services to non-UK Professional/Institutional clients only. Baillie Gifford Overseas Limited is wholly owned by Baillie Gifford & Co. Baillie Gifford & Co and Baillie Gifford Overseas Limited are authorised and regulated by the FCA in the UK.
Persons resident or domiciled outside the UK should consult with their professional advisers as to whether they require any governmental or other consents in order to enable them to invest, and with their tax advisers for advice relevant to their own particular circumstances.
Baillie Gifford Investment Management (Europe) Limited provides investment management and advisory services to European (excluding UK) clients. It was incorporated in Ireland in May 2018 and is authorised by the Central Bank of Ireland. Through its MiFID passport, it has established Baillie Gifford Investment Management (Europe) Limited (Frankfurt Branch) to market its investment management and advisory services and distribute Baillie Gifford Worldwide Funds plc in Germany. Baillie Gifford Investment Management (Europe) Limited also has a representative office in Zurich, Switzerland pursuant to Art. 58 of the Federal Act on Financial Institutions (“FinIA”). It does not constitute a branch and therefore does not have authority to commit Baillie Gifford Investment Management (Europe) Limited. It is the intention to ask for the authorisation by the Swiss Financial Market Supervisory Authority (FINMA) to maintain this representative office of a foreign asset manager of collective assets in Switzerland pursuant to the applicable transitional provisions of FinIA. Baillie Gifford Investment Management (Europe) Limited is a wholly owned subsidiary of Baillie Gifford Overseas Limited, which is wholly owned by Baillie Gifford & Co.
Baillie Gifford Asia (Hong Kong) Limited 柏基亞洲(香港)有限公司 iis wholly owned by Baillie Gifford Overseas Limited and holds a Type 1 and a Type 2 licence from the Securities & Futures Commission of Hong Kong to market and distribute Baillie Gifford’s range of collective investment schemes to professional investors in Hong Kong. Baillie Gifford Asia (Hong Kong) Limited 柏基亞洲(香港)有限公司 can be contacted at Room 3009-3010, One International Finance Centre, 1 Harbour View Street, Central, Hong Kong. Telephone +852 3756 5700.
Baillie Gifford Overseas Limited is licensed with the Financial Services Commission in South Korea as a cross border Discretionary Investment Manager and Non-discretionary Investment Adviser.
Mitsubishi UFJ Baillie Gifford Asset Management Limited (‘MUBGAM’) is a joint venture company between Mitsubishi UFJ Trust & Banking Corporation and Baillie Gifford Overseas Limited. MUBGAM is authorised and regulated by the Financial Conduct Authority.
This material is provided on the basis that you are a wholesale client as defined within s761G of the Corporations Act 2001 (Cth). Baillie Gifford Overseas Limited (ARBN 118 567 178) is registered as a foreign company under the Corporations Act 2001 (Cth). It is exempt from the requirement to hold an Australian Financial Services License under the Corporations Act 2001 (Cth) in respect of these financial services provided to Australian wholesale clients. Baillie Gifford Overseas Limited is authorised and regulated by the Financial Conduct Authority under UK laws which differ from those applicable in Australia.
Baillie Gifford Overseas Limited is registered as a Foreign Financial Services Provider with the Financial Sector Conduct Authority in South Africa.
Baillie Gifford International LLC is wholly owned by Baillie Gifford Overseas Limited; it was formed in Delaware in 2005 and is registered with the SEC. It is the legal entity through which Baillie Gifford Overseas Limited provides client service and marketing functions in North America. Baillie Gifford Overseas Limited is registered with the SEC in the United States of America.
The Manager is not resident in Canada, its head office and principal place of business is in Edinburgh, Scotland. Baillie Gifford Overseas Limited is regulated in Canada as a portfolio manager and exempt market dealer with the Ontario Securities Commission (‘OSC’). Its portfolio manager licence is currently passported into Alberta, Quebec, Saskatchewan, Manitoba and Newfoundland & Labrador whereas the exempt market dealer licence is passported across all Canadian provinces and territories. Baillie Gifford International LLC is regulated by the OSC as an exempt market and its licence is passported across all Canadian provinces and territories. Baillie Gifford Investment Management (Europe) Limited (‘BGE’) relies on the International Investment Fund Manager Exemption in the provinces of Ontario and Quebec.
Baillie Gifford Overseas is not licensed under Israel’s Regulation of Investment Advising, Investment Marketing and Portfolio Management Law, 5755-1995 (the Advice Law) and does not carry insurance pursuant to the Advice Law. This document is only intended for those categories of Israeli residents who are qualified clients listed on the First Addendum to the Advice Law.
Baillie Gifford Overseas Limited (“BGO”) neither has a registered business presence nor a representative office in Oman and does not undertake banking business or provide financial services in Oman. Consequently, BGO is not regulated by either the Central Bank of Oman or Oman’s Capital Market Authority. No authorization, licence or approval has been received from the Capital Market Authority of Oman or any other regulatory authority in Oman, to provide such advice or service within Oman. BGO does not solicit business in Oman and does not market, offer, sell or distribute any financial or investment products or services in Oman and no subscription to any securities, products or financial services may or will be consummated within Oman. The recipient of this document represents that it is a financial institution or a sophisticated investor (as described in Article 139 of the Executive Regulations of the Capital Market Law) and that its officers/employees have such experience in business and financial matters that they are capable of evaluating the merits and risks of investments.
This strategy is only being offered to a limited number of investors who are willing and able to conduct an independent investigation of the risks involved. This does not constitute an offer to the public and is for the use only of the named addressee and should not be given or shown to any other person (other than employees, agents, or consultants in connection with the addressee’s consideration thereof). Baillie Gifford Overseas Limited has not been and will not be registered with Qatar Central Bank or under any laws of the State of Qatar. No transactions will be concluded in your jurisdiction and any inquiries regarding the strategy should be made to Baillie Gifford.
51354 INS WE 0764
YOU MAY ALSO LIKEInsights.Visit Baillie Gifford's Insights page.Baillie Gifford China Growth Trust plc.Roderick Snell and Sophie Earnshaw, co-managers of the China Growth Trust talk to Alex Blake, Investment Trusts Director, on why we’re excited about China, why we believe Baillie Gifford is the right manager for the trust, and what our investment approach will look like.Riding Growth WavesGood investing takes quick reactions as well as a long-term vision.Japan’s Software Disruptors.How does a company de-age? Jared Anderson thinks about how Japanese companies are changing their working practices to meet modern expectations.