Investors can expect somewhat higher returns from several asset classes over the next 10 years, although still with some ups and downs—driven in part by today’s higher interest rates, according to BNY Mellon Wealth Management.
The wealth manager’s annual 10-year forecast for global capital markets, based on forecasts from the bank’s global economic and investment analysis group, argues the case for these potentially stronger returns despite some softening in economic activity at the start of next year and heightened geopolitical tensions, among other uncertainties.
Overall, BNY Mellon expects a traditional portfolio mix of 60% stocks and 40% bonds could generate annual returns of 6.4% over the next decade, up from the 5.5% annual return assumption made last year. A global, balanced multi-asset portfolio that includes international securities, real-estate investment trusts, a range of stocks, and a 15% allocation to hedge funds could see annual returns of 6.2% annually in the next 10 years, up from the 5.9% annual assumption in last year’s analysis.
A key assumption of the report is that central banks will begin lowering interest rates next year, but that rate levels will still be higher than in the decade after the financial crisis of 2008-09.
The shift up in portfolio returns reflects a 7.4% expected annualized return for U.S. stocks in the next 10 years, up from the 6.5% assumption made last year. This is mainly because BNY Mellon expects better intermediate valuations for U.S. stocks and because of resilient economic growth this year compared with other regions, which was a surprise to Sinead Colton Grant, head of investor solutions for the wealth management firm.
Meanwhile, higher yields on fixed-income securities, coupled with improved bond yield expectations, is a return to past market norms from low—even negative—bond yields, Colton Grant says.
Though the wealth manager’s capital market assumptions can vary year to year, they do these forecasts to give clients a long-term view of potential risks and returns of various asset classes, which is useful for designing diversified portfolios.
The assumptions are also useful for recalibrating strategies, Colton Grant says, enabling investors to identify any adjustments they need to make to their mix of assets to achieve their financial goals.
One of BNY Mellon’s key themes heading into the next decade is “deglobalization,” which it says has been driven since 2008 by emerging nations developing more robust consumer economies. These countries want to be less dependent on imports, which puts pressure on companies to avoid “supply shocks and disruption due to wars, global pandemics, perceived unfair trade practices, and national security threats,” according to the report. Such moves will lead to less global trade, more protectionism, and rising corporate operating costs, the report said.
The wealth manager expects these trends, in addition to economic uncertainty, will cause annualized returns for emerging market stocks to drop to 7.3% for the next 10 years from its previous 9.3% assumption.
Colton Grant spoke with Penta to discuss insights from the 2024 report, and how investors can respond to BNY Mellon’s latest long-term market assumptions.
Strength in Bonds
Most classes of bonds will deliver higher returns in the years ahead largely because of rising yields. Yet with interest rates remaining higher for longer, the wealth manager expects more volatility, and Colton Grant says markets are already responding “aggressively” to shifted expectations for Fed interest rates.
“We’re in a place where fixed-income markets and then equity markets by extension are viewing softer data on the economy being good news,” because it could lead to lower rates, she adds.
According to BNY Mellon’s assumptions, the Bloomberg U.S. Intermediate Municipal index will return 3.6% annually for 10 years, up from a 2.8% assumption last year, while the Bloomberg U.S. Aggregate Index will return 4.8% annually for the next 10 years, up from the 4.1% annualized assumption of a year ago. An exception is high-yield, where a slowdown in the first part of next year could lead to shakier forecasts for the companies that issue these bonds, leading to wider yields over comparable Treasuries.
The Bloomberg U.S. High Yield index is now expected to return 5.8% annually in the next decade, down from last year’s 6.2% annualized forecast.
Cash is “unusually attractive,” with 3-6 month Treasury bills forecasted to return 3.3% over the next 10 years, up from a 2.3% 10-year annualized forecast last year. Given the option today to earn even higher returns from other securities, those rates are likely to fall in the future, Colton Grant says. It’s a great time to move out of cash and into high-yield bonds, she says.
Private-Market Opportunities
With companies waiting longer to go public, Colton Grant says investors rarely get access to invest in them until they are large-cap companies. This means missing out on the growth opportunities usually available to small-cap investors. “The only way you can get an equivalent exposure is through private markets,” she says.
Climate policies driving the energy transition toward renewables and related infrastructure investments and away from fossil fuels are another potential source of private market investments.
“The sums required for the energy transition will come in the form of both direct government investments and incentives designed to harness private sector capital,” the report said.
Investment Opportunities in AI and Aging Populations
One source of potential returns in the next decade is artificial intelligence, according to the report.
The development of this technology has already driven returns for several big tech stocks in the group known as the Magnificent Seven—
Alphabet,
Amazon,
Apple,
Meta,
Microsoft,
Nvidia,
and
Tesla
—in the past year, Colton Grant says. AI not only has the potential to temper inflation by increasing productivity while potentially lowering costs for companies and customers, but also to impact the broader economy. The consulting firm PwC has suggested AI will boost global GDP by almost US$16 trillion by 2030.
AI intersects with another theme the wealth manager has identified: aging populations.
“Without changes to behavior or policy, all countries should expect to see increases in retirement and healthcare funding and spending,” BNY Mellon said in the report.
One notable example is China, which has one of the most rapidly aging populations and already spends 5% of its GDP on public pensions. Because GDP growth results from population and productivity growth, Colton Grant says China will need productivity advances through technology such as AI to offset the effects of its aging population. Investors should keep these trends in mind when assessing long-term investment allocations.
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