The Age of Confusion: what to expect from returns in the next five years

Robeco has published the twelfth edition of its annual Expected Returns (2023-2027) report, which provides an overview of what investors can expect over the next five years across major asset categories.

The Age of Confusion: 2023-2027. Thus define Robeco the five-year period that we will enter in a few months. And there is no lack of arguments. There is no denying the many unpredictable moving parts of the market as a backdrop, including the energy and food crises, double-digit inflation rates in developed countries, and China’s trajectory as the main engine of global growth.

Continuing fiscal stimulus measures stemming from the pandemic, supply chain issues, and the war between Russia and Ukraine have all contributed to unexpectedly high inflation over the past year. And as you well remember from the manager, Only the most veteran investors know firsthand the devastating effects that such high inflation can have on purchasing power and investment portfolios..

What returns to expect for the next five years

Robeco has published the twelfth edition of its annual report Expected Returns (2023-2027), which seeks to offer a perspective of what investors can expect in the next five years in relation to the main asset categories.

Going to the point, the image that the Dutch manager draws for the portfolios is not particularly optimistic. Her prediction is that the return on assets remains below their historical averages long-term over the next five years. Mainly due to low risk-free interest rates. A noteworthy point is that they calculate that the equity risk premium will reach 3% for the first time in the 12-year history of the Expected Returns publication. This means that it will be below its long-term average of 3.5%.

”In our opinion, the bar for inflation to take hold is quite high and recessionswhich we hope will occur in one way or another in each of our scenarios, they are very disinflationary. However, the possible appearance of an asymmetry in the distribution of the frequency of expected inflation in developed economies is a key common thread for the period 2023-2027″, analyzes Peter van der Wellemulti-asset strategist at Robeco.

Font: Robeco. September 2022.

A risk and a tailwind

A positive point. For the investors with an international portfolio whose currency is the US dollar, the prospects are more promising. Because they expect other currencies to appreciate against the US dollar and that the greenback bull market comes to an end in the next five years.

In this Age of Confusion, the future has become less predictable, says Robeco analyst Laurens Swinkels. Also with regard to the consequences of climate risk. The exact magnitude of climate change over the coming decades is uncertain, and its impact on asset prices is even more uncertain. What we do know, however, is that asset allocators need to seriously consider the long-term impact of climate change on the performance of different asset classes.

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