Quick Clips: 2023 Capital Market Assumptions for Major Asset Classes
January 27, 2023
Topics - Asset Allocation Strategic Asset Allocation Portfolio Construction
In our latest Capital Market Assumptions for Major Asset Classes, we update our estimates of medium-term (5- to 10-year) expected returns for major asset classes. We also include two special topics: one highlighting the case for emerging market equities, and the other assessing the impact of large interest rate rises on various risk premia.
After 2022 losses, are we still in a world of low expected returns and elevated macro uncertainty?
Traditional 6040 stock bond portfolios are still offering below average expected returns… Even after the 2022 repricing. As a result, investors are unlikely to meet return targets over the next 10 years. Furthermore, macroeconomic volatility is likely to be elevated in 2023, creating additional risks and headwinds for traditional portfolios.
What are three practical suggestions that can help investors navigate the current challenging environment?
What are three practical suggestions that can help investors navigate the current challenging environment? First up is allocating to long/short value. Next up is allocating to EM equity from US equities. Last up is allocating to trend following strategies, especially those using both price and economic signals in both traditional and hard-to-access, alternative markets.
How have higher cash rates impacted risk premia of bonds, equities and private assets?
A year ago, real cash rates were deeply negative, which was dragging down expected real returns on other asset classes, even though premia were fairly normal. After all, the riskless cash rate is part of the discount rate for all risky assets. Now, those riskless discount rates have normalized, and you’d expect a big repricing of risky assets too. Some, including most fixed income assets, have repriced, keeping their expected premia intact. Others – equities and especially private assets – haven’t repriced enough, leaving their risk premia looking compressed.
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