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.
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