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Challenging future financial return assumptions

During the past 30 years, financial markets repeatedly went through boom and bust cycles both in developed and emerging markets. Despite the asset price declines during bear markets, long-term investors who held on to their investments in equities and bonds still earned total returns that were well above long-term averages. Many investors have become used to the high returns of their investment portfolios and assume that future performance will be similar to what they observed in the past.

Several years ago already, onValues has started working with clients to derive more realistic expectations for future portfolio returns. Our analysis shows that the drivers leading to the exceptional returns of the past years are weakening and that asset returns will probably be below historical averages during the next decade. A recent McKinsey Global Institute report gives a good overview of the challenges ahead by taking a closer look at the driving forces of asset returns. The study concludes that in the recent past, asset returns were lifted by a unique but now fading combination of economic and business factors. Using a multi-factor approach with real economy and corporate fundamental factors, McKinsey argues that investment returns in the US and Europe over the next 20 years could be substantially lower – even in very favourable economic scenarios. These findings are consistent with those based on several other approaches seeking to forecast asset returns. onValues, for example, uses deviations from long-term asset valuation levels as one of the major determinants of future returns (see this previous news). Based on these signals we review our clients’ investment strategies, adjust expected asset class and portfolio returns, and are able to point to particularly attractive or unattractive investment areas.

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