Asset Allocation

Quick Clips: 2023 Capital Market Assumptions for Major Asset Classes

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Quick Clips: 2023 Capital Market Assumptions for Major Asset Classes

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?

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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?

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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?

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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.

This document is not intended to, and does not relate specifically to any investment strategy or product that AQR offers. It is being provided merely to provide a framework to assist in the implementation of an investor’s own analysis and an investor’s own view on the topic discussed herein.

This document has been provided to you solely for information purposes and does not constitute an offer or solicitation of an offer or any advice or recommendation to purchase any securities or other financial instruments and may not be construed as such. The factual information set forth herein has been obtained or derived from sources believed by the author and AQR Capital Management, LLC (“AQR”) to be reliable but it is not necessarily all-inclusive and is not guaranteed as to its accuracy and is not to be regarded as a representation or warranty, express or implied, as to the information’s accuracy or completeness, nor should the attached information serve as the basis of any investment decision. This document is not to be reproduced or redistributed to any other person. The information set forth herein has been provided to you as secondary information and should not be the primary source for any investment or allocation decision. Past performance is not a guarantee of future performance. 

This material is not research and should not be treated as research. This paper does not represent valuation judgments with respect to any financial instrument, issuer, security or sector that may be described or referenced herein and does not represent a formal or official view of AQR. The views expressed reflect the current views as of the date hereof and neither the author nor AQR undertakes to advise you of any changes in the views expressed herein. 

The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons. Charts and graphs provided herein are for illustrative purposes only. The information in this presentation has been developed internally and/or obtained from sources believed to be reliable; however, neither AQR nor the author guarantees the accuracy, adequacy or completeness of such information. Nothing contained herein constitutes investment, legal, tax or other advice nor is it to be relied on in making an investment or other decision. There can be no assurance that an investment strategy will be successful. Historic market trends are not reliable indicators of actual future market behavior or future performance of any particular investment which may differ materially, and should not be relied upon as such. Diversification does not eliminate the risk of experiencing investment losses.

The information in this paper may contain projections or other forward-looking statements regarding future events, targets, forecasts or expectations regarding the strategies described herein, and is only current as of the date indicated. There is no assurance that such events or targets will be achieved, and may be significantly different from that shown here. The information in this document, including statements concerning financial market trends, is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons.