Abu Dhabi, UAESaturday 24 March 2018

Investors must brace themselves for big asset drops and low returns

As the investment landscape darkens, financial institutions such as Morgan Stanley are warning of a very different future across global markets

Trader Ryan Falvey on the floor of the New York Stock Exchange. Relentless monetary stimulus and positive growth momentum have seen stock and bond prices across global markets reach record levels over the past eight years. Richard Drew, AP
Trader Ryan Falvey on the floor of the New York Stock Exchange. Relentless monetary stimulus and positive growth momentum have seen stock and bond prices across global markets reach record levels over the past eight years. Richard Drew, AP

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 and Grantham Mayo Van Otterloo.

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 US$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. US stocks, for example, have posted a 14.3 per cent annualised return over the last five years - GMO projects a 4 per cent annual decline for US large-cap stocks over the next seven years.

Investors are keeping the faith despite rich valuations. Equity funds received a cool $8.8bn in the week to October 18, according to Bank of America, citing EPFR data, spurred by exuberance towards US stocks.

There’s one quantum of solace: Jeremy Grantham’s firm projects US inflation will return to its long-term average, suggesting that if weak core prices endure, the bar for real returns will be lowered.

Morgan Stanley

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 to juice profits after inflation.

That’s the takeaway from Morgan Stanley strategists this week, who forecast a 60/40 equity-bond portfolio split will deliver 4.2 per cent per year in dollar terms and 4.7 per cent 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.


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Goldman Sachs Group

And the cloudy outlook for investors could come sooner than you think.

Goldman Sachs projects losses over the next 12 months across US 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 per cent 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.

Robeco Group

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.