Core Matters I Investment Returns: A 5-year perspective

Highlights:

• 2019 has seen huge inflows into Fixed Income (FI) funds and outflows from Equities. From a medium-term return perspective this makes no sense. The formidable demand for safe assets reflects cyclical and structural forces (e.g. ageing).
• No matter the economic scenario, FI returns over the next five years are doomed. Government bonds and IG credit will struggle to deliver positive returns. Riskier credit should do better, yet will hardly beat inflation. Worse still, FI assets, especially in EUR, will barely offer cushion to portfolios in an alternative recession scenario.
• Valuations in Equities are much less stretched than in FI. They will not repeat the performance of the past ten years, but are still likely to deliver mid-single digit returns over the next five years.
• The positive tail-risk takes the form of an innovation and productivity shock boosting both real rates and profits. The negative financial tail risk includes a severe recession (unlikely) or a new form of populism tackling income inequality. The latter would likely support long-term stability but over five years would imply higher inflation and taxes.

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