Long-Term Capital Market Assumptions Executive Summary
A broad overview of our 2019 Long-Term Capital Market Assumptions (LTCMAs)
This executive summary provides a context for how some of the structural factors affecting economies today are likely to drive asset returns over a 10- to 15-year investment horizon. The key takeaways from this year’s LTCMAs:
- Our 2019 estimate for real global GDP growth of 2.5% is unchanged from last year, and despite a few country-level adjustments, the secular growth outlook is stable and risks are balanced. Asset returns at equilibrium look reasonable by historical standards, but cyclical headwinds constrain our return forecasts today and still present a challenge.
- Cyclical risks are building, many economies are operating above trend with little slack, and asset valuations are elevated. While long-term investors should consider returns over the whole cycle, the starting point matters greatly to the long-term outlook. Traditional investment frameworks reflect market risk quite well but may not capture factors like illiquidity risk, which can profoundly affect asset returns late in the cycle.
- Bond return forecasts improve this year, notably in the U.S., where policy normalization has created a favourable entry point. Global equity returns are unchanged, but there is some regional divergence, which may offer opportunities for investors. Alternatives are a relative bright spot, as fee reduction and improved alpha trends lend support.
- Expected returns for a U.S. 60/40 portfolio are slightly better, and the stock-bond frontier rotated further in a clockwise direction due to higher expected bond returns. In other regions, the frontier is little changed. This reflects both the late-cycle environment in the U.S. and the regional divergence in economic cycles. Ex-ante Sharpe ratios for U.S. Treasuries now meaningfully exceed those of U.S. stocks for the first time in a decade.
- Our message this year is to manage outside the mean. This implies looking for insight beyond our traditional mean-variance tools to help us navigate the end of this cycle. In the longer term, it suggests that while mean reversion is a powerful force, it isn’t infallible and we must be mindful which of today’s dislocations may be tomorrow’s new equilibria.