How to prepare for the low return environment ahead

BlackRock’s Global Chief Investment Strategist Richard Turnill explains why investors aiming for higher returns over the next five years should be prepared to stomach this.

The big takeaway from this week’s chart of the week: Investors aiming for higher returns over the next five years should be prepared to stomach more volatility.

This week we updated our quarterly “capital market assumptions” estimates for future returns. We now see lower potential returns ahead for many asset classes over the next five years, given moderate economic growth and stretched valuations.

The bars in the chart below show our annual return assumptions for selected asset classes over the next five years, while the dots show our expectations of volatility.

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Many of our return assumptions are now at or near post-crisis lows, with many expected returns below historical averages, according to our analysis using Bloomberg data. These assumptions reflect lower global growth over the five years, in line with a long, flat U.S. recovery.

Generating returns is likely to be particularly challenging for investors in U.S. assets. We see a wider gap between the prospective returns for safe-haven and risk assets, reflected in higher expected returns for equities versus bonds and for non-U.S. equities versus U.S. equities. Alternatives come with higher returns, but also higher volatility and illiquidity.

The bottom line: Generating higher potential returns over the longer term will likely involve accepting more volatility or illiquidity risk, or focusing on assets with higher return potential. Read more about the lower return environment ahead in my latest weekly commentary.

 

Richard Turnill is BlackRock’s global chief investment strategist. He is a regular contributor to The Blog.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of April 2016 and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this post is at the sole discretion of the reader.

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