The BlackRock Investment Institute’s quarterly ‘Capital Market Assumptions’ report, which is a guide many investors use around the world, has plumbed new lows following market volatility since late last year.
The latest report, published last week, puts the five-year returns for both equities and bonds at near post-GFC lows.
The main points, BlackRock says, are:
- Compressed market returns in the next five years due to stretched valuations and moderate economic growth. The base case calls for 2 per cent real GDP growth for advanced economies, inflation below central banks’ targets and 4 per cent to 5 per cent growth in emerging markets.
- Equities to outperform fixed income in the medium term. The economic base case and the valuation gap between equities and bonds support the case for strong performance from equities relative to fixed income over the next five years.
- The five-year return assumptions are lower than long-term assumptions due to BlackRock’s views on current valuations and macro-economic conditions. The 10-year-plus capital market assumptions are based on normalised valuations and interest rate levels, and are driven by five risk premia: equity, duration, inflation, credit and illiquidity.
The world’s largest fund manager is expecting private equity and emerging markets to be the best performing asset classes over the next five years, with 6.9 per cent and 6.5 per cent returns respectively. Global large-cap equities are expected to produce 5.8 per cent annualised, compared with 4.3 per cent for US large caps.
Unlike the views from many other big fund managers, BlackRock is expecting most of the other alternative asset classes, such as global real estate and infrastructure, to underperform global equities during this period. However, the comparisons between them all will tend to normalise over a longer, 10-year, period.
The report also points to continued high volatility over the next five years, with private equity and emerging markets expected to be the most volatile of asset classes.