Over the first quarter of 2022, global markets remained under pressure, impacted by persistent inflationary fears and geopolitical risks. The prospect of monetary tightening across global central banks resulted in a historically weak quarter for fixed-rate assets, as both nominal and real yields across the fixed income complex repriced significantly higher in Q1. As at the 31st of March 2022, investors anticipated in the range of 8 Fed Funds hikes for the US for the next two year, which reflected in the sharp selloff in short term US Treasury yields. Equities and other risk assets also experienced declining valuations despite what remains a fundamentally strong earnings outlook over the next year.

While these market moves have resulted in challenging investment returns, the longer -term prospect for investment returns, particularly in the fixed income space, has improved if one assumes no further deterioration in inflation. Across developed market sovereign bonds markets, real interest rates have moved back toward, and in some cases, into positive territory, becoming less of a hurdle for real income generation for fixed income investors.

Still, return expectations for the next decade remain below historical averages, and, in some cases, still face trisks of the prospective of persistently higher levels inflation, which also has the potential to deteriorate real earnings growth.

Our models now estimate a forecasted return of 5.6% from the MSCI All Country World Index (“ACWI”) annually for the next decade, versus 4.6% just a quarter ago. At an aggregate level, we estimate the forecasted rate of return on a diversified portfolio of assets is now 4.9%, up 1% from the level at the beginning of the year.

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