Investors advised to look at riskier assets

In its seven-year asset class forecast, Schroders expects cash and bonds to deliver negative real returns. While riskier assets including credit, equity and alternatives might achieve positive returns, these are not assured.

While Schroder’s macroeconomic forecasts expect growth to recover, it is sub par by past standards. Moreover, Schroders expects marginally higher inflation in developed markets with the biggest upward revision in the UK. However, this development is due to the very low levels of inflation exhibited in the past years. On the other hand, emerging markets inflation levels are expected to reduce due to lower oil prices and structural changes in high inflation countries such as Brazil, India and Russia.

In this environment, the best returns are offered by equities in the Pacific region (ex Japan), followed by Japan and other emerging markets, shows Schroders' Seven-year asset class forecast returns. While the highest returns are still expected to be generated by equities, the gap between equity and other investment’s returns is closing. An example of this development is that emerging market dollar debt is competitive with many equity markets. Moreover, US high yield credit is forecasted to deliver higher returns than US equities. However, Schroder reminds investors of also considering relative volatility, “which tends to be higher for equities, particularly the higher yielding EM market." 

At the other end of the scale, cash and bonds, except US Treasuries, are expected to lose money over seven years. In comparison to last years report, at reduced losses though. If central bank policy normalises, Schroders expects that the point of real returns from lower yielding assets could soon be reached.

Further information on the methodology and returns forecasts can be found in Schroders' article and report.