As regions across the globe emerge from the COVID-19 pandemic, there is a growing sense of optimism about economic acceleration. The strength in global PMIs and measures of consumer confidence (such as the University of Michigan consumer sentiment and the European Commission consumer confidence) are further bolstered by the prospect of sizeable fiscal stimulus packages that are likely to arrive in the US and in Europe in the coming months.

The continued dovish monetary policy backdrop combined with this anticipated economic acceleration have stirred up market concerns over inflationary risks. Particularly, as the return outlook for nominal assets such as fixed income has repriced lower over the past year, investors are increasingly looking to alternative sources of return in anticipation of this reflationary environment.

The contrast between real and nominal assets is already being felt to an extent across our model 10yr return forecasts, as higher equity and real asset returns reflect modestly higher inflation expectations, although this is largely offset by more challenging valuations as prices for risk assets have continued to rise. Over the past quarter, government bond yields have repriced modestly higher but still remain negative in real terms and are susceptible to inflationary risks. Our models now estimate a forecasted return of 4.8% from the MSCI All Country World Index (“ACWI”) annually for the next decade, about half of what investors have received over the past decade[1]. At an aggregate level, we estimate the forecasted rate of return on a diversified portfolio of assets is now 4.2%, up 10 bps from the level at the beginning of the year.

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1. MSCI ACWI generated an annualized 9.14% total return from 3/31/2011 to 3/31/2021


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