The BlackRock Investment Institute says its five-year return assumptions for equities and bonds are near post-financial crisis lows, in its latest “capital market assumptions” report.
BII capital market assumptions cover two time horizons: 10-year-plus capital markets assumptions that can be used as key inputs for strategic asset allocation, and five-year assumptions that take into account how it thinks current economic and market conditions will play out in the medium term.
It says there are three overarching points to keep in mind:
- BII expects compressed market returns in the next five years due to stretched valuations and moderate economic growth. Its base case calls for 2% real GDP growth for advanced economies, inflation below central banks’ targets and 4% to 5% growth in emerging markets.
- It sees equities outperforming fixed income in the medium term. Its 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.
- Its five-year return assumptions are lower than its long-term assumptions due to its views on current valuations and macro-economic conditions. Its 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 full report with expanded information on each asset class is available here.