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6 Themes to Drive Your Investments: Capital Market Assumptions Five-Year Outlook

Central banks’ fear of failure. Inflation going nowhere. The boring economic (non-) cycle. These are some of the trends summarized in the six themes we believe will drive portfolio performance in the years ahead.

Central banks’ fear of failure. Inflation going nowhere. The boring economic (non-) cycle. These are some of the trends summarized in the six themes we believe will drive portfolio performance in the years ahead.

Our 2018 capital market assumptions identified:

1/ Mild Growth Myopia



The same forces keeping a lid on global economic growth also have buffered downturns and created an extended cycle supportive of higher equity valuations. The subdued cycle — we see annual global growth at 2.5% over the next five years — and strengthened financial system may lead to global equity returns that will be below long-term historical averages but higher than what current valuations would predict.

Steady growth supports equities across developed and emerging markets and keeps credit spreads in check for investment-grade and high-yield bonds.

2/ Stuckflation

Low and durable structural inflation altered both monetary policymaking and investor behavior. Most major central banks fell well short of their 2% annual inflation targets over the past decade, limiting their will to increase interest rates.

We think the 30-year bond bull market has ended, but that doesn’t mean a bear market will start. The 10-year Treasury yield should stay somewhere in the 2.75% range, keeping long-term bond returns low.

3/ Pass/Fail Monetarism

Without a template for policy normalization, central banks; efforts cannot be graded – but they must not fail lest they ignite recessions. Building “dry powder” by raising rates too fast will only increase the odds that they’ll need to use it, which is self-defeating.

Don’t look for short-term and cash yields to rise significantly, but the easy monetary policy should support equities.

4/ Technology Slow Zone

Data has become an economic force, but it also raises issues that need to be addressed. Politicians are maneuvering to right-sized regulations, but technology’s benefits are too great to be throttled for long. Already, the pressure technology-adept companies are exerting on the marketplace are resulting in lower prices for consumers.

Tech will continue to drive the global economy that will help support stable equity returns.

5/ Global (Re)Positioning System

The irreversible fade of legacy multilateral institutions is creating as many investment opportunities as risks across asset classes. Global engagement will continue, but based on transactions-oriented frameworks rather than ideological ones.

The transitions will continue to induce volatility as investors confront change, making a strategic allocation to real assets – which should provide equity-like returns coupled with valuable diversification – a wise hedge in portfolios. Over time, the tug-of-war between free markets and managed capitalism will be resolved somewhere in the middle.

6/ Executive Power Drive

Populism has often been described as a road to economic dysfunction. But for now, investors have accepted the movement and been rewarded with strong returns. Expect some volatility in equities over short-term concerns with political changes, as investors appear open-minded about the more aggressive approach – as long as it supports economic growth.

As a result, we don’t see the changing political landscape causing major disruptions to equity and bond returns.