Financial markets are coming of age

Financial markets are coming of age

18-09-2017 | 5-Year outlook
Riskier assets are seen returning less as financial markets face a ‘coming of age’, our new five-year outlook predicts.
  • Lukas Daalder
    Lukas
    Daalder
    Chief Investment Officer

Speed read

  • Quantitative Tightening is set to be main theme for 2018-2022
  • Ongoing recovery seen but with chance of mild recession
  • Equities are preferred though returns are forecast to be lower
Would you like to read the full report?
Would you like to read the full report?
Download 'Expected Returns 2018-2022'

Expected Returns 2018-2022 predicts that developed market stocks will earn an average 5% a year, down from the 6.5% forecast in the previous 2017-2021 edition. We have also downsized our expectations for emerging markets equities, forecasting annual gains of 6.25% against 7.25% last time.

In tandem with this, we are less bearish on government bonds. For the coming five years we predict that the benchmark German 10-year government bonds will deliver returns of -2.5%, slightly better (or less worse) than the -3.5% seen for this asset class last time. And as AAA-rated bonds become relatively more attractive, we believe the reverse is true for sub-investment grade: for high yield bonds we see returns of 0.25% over the next five years, greatly reduced from 1.0% in the prior review.

For alternative investments, there is no change in our view that commodities should return 2.75% a year over the coming period, though we see indirect real estate returning slightly less, with returns of 4.25% against 5.0% last time. For cash – the placebo against which all other investment returns are compared – is seen returning 0.5%.

“If we look at the various trends that we expect to shape the financial markets in the five years ahead, coming of age seems to be a recurring theme,” says Lukas Daalder, Chief Investment Officer of Robeco Investment Solutions and a co-author of Expected Returns.

“Narrowly defined, ‘coming of age’ refers to reaching adulthood, but is more broadly interpreted to mean the start a new stage of development; the next step in an ongoing evolution. Using this broader meaning, we have seen numerous developments in recent years and decades that are now on the verge of entering a new stage, which can have important consequences for financial markets moving forward.”

Will QT be a cutie?

Daalder says the biggest influence is likely to be when central banks begin to unravel QE with a new phenomenon – Quantitative Tightening, or QT. “The stimulus programs that started as an antidote to the Great Recession and Global Financial Crisis a decade ago brought in an unprecedented era of historically low (and even negative) interest rates, plus USD 7.2 trillion in central bank bond buying,” he says. “What will happen to financial markets once central banks start to reverse this process?”

“On balance, we have lowered our outlook for most assets, and expect to see more volatility ahead. This may sound more negative than it is: the weighted returns for a well-diversified portfolio will actually decrease only slightly.”

For the wider picture, the outlook’s baseline economic scenario is once again for a continued recovery, but with an increased likelihood that the world economy will be hit by a mild recession sometime during the next five years. The main changes occur in the other two less likely scenarios: that of either stagnation or surprisingly high growth.

“Given that we think a gradual return to normalization is continuing (60% probability), the probability of secular stagnation has been lowered from 30% to 20%,” says Daalder. “Likewise, the prospect of a high-growth scenario, characterized by a debt-fuelled boom-bust dynamic, has been raised from 10% to 20%.”

Special topics

This year we present five special topics – up from three last time – broadly based on the coming of age theme. In ‘Secular stagnation is a stagnating theory’, our experts argue that such a low-growth scenario remains unlikely. We are instead gradually getting back to normal, and subsequently, Investors are not complacent in assessing risks’, our second feature states.

‘The future of the euro: to integrate or disintegrate?’ looks at how the single currency really is coming of age, celebrating its 18th birthday in 2017. For other asset classes, we argue that stocks and fixed income are not as different as you might think, describing this as ‘Bonds are from Venus, equities are also from Venus’. Finally, as passive investing continues to be popular, ‘The pitfalls of passive in a global multi-asset benchmark’ is examined by our specialists.

This article is a summary of one of the five special topics in our new five-year outlook.

Expected Returns 2018-2022.
Expected Returns 2018-2022.
Read all articles

Important information

The contents of this document have not been reviewed by the Securities and Futures Commission ("SFC") in Hong Kong. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice. This document has been distributed by Robeco Hong Kong Limited (‘Robeco’). Robeco is regulated by the SFC in Hong Kong.
This document has been prepared on a confidential basis solely for the recipient and is for information purposes only. Any reproduction or distribution of this documentation, in whole or in part, or the disclosure of its contents, without the prior written consent of Robeco, is prohibited. By accepting this documentation, the recipient agrees to the foregoing
This document is intended to provide the reader with information on Robeco’s specific capabilities, but does not constitute a recommendation to buy or sell certain securities or investment products. Investment decisions should only be based on the relevant prospectus and on thorough financial, fiscal and legal advice. Please refer to the relevant offering documents for details including the risk factors before making any investment decisions.
The contents of this document are based upon sources of information believed to be reliable. This document is not intended for distribution to or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation.
Investment Involves risks. Historical returns are provided for illustrative purposes only and do not necessarily reflect Robeco’s expectations for the future. The value of your investments may fluctuate. Past performance is no indication of current or future performance.