DWS Long View - Update

Summary

Within this report, we present DWS long-term return expectations[1] from the major asset classes.

We published a report in April analyzing the impact of COVID-19 pandemic on long-term return forecasts. Because of the uncertainties that existed at that time, the report presented three scenarios: status-quo, 2009-repeat, and three-sigma. Over the past quarter it has become clear that while the ongoing crisis is a three-sigma type event from an economic perspective, the impact on corporate fundamentals may be comparable to those witnessed in 2009. Prompt actions from governments and central banks, better capitalization in key economic sectors (Financials), and greater ‘sponginess’ in equities have all helped, as was highlighted in our April report[2]. Therefore, 2009-repeat is our base scenario now.

Investor sentiment has rebounded quickly in Q2. Several key equity market benchmarks are now close to their beginning-of-the-year levels with the NASDAQ 100 index at a record level. Some investors may find this irrational, but as highlighted in our March report (History Lessons – why do markets sell-off and then rebound), in absence of a credit crisis, a 50% loss of earnings for 2 years would only require a 5% fall in prices, if he discount rate was held constant. Still, this leaves investors with an underwhelming expectation of real and nominal returns over the next decade.

At an aggregate level, we estimate the expected return from a diversified portfolio of assets is now 4.9%, down from 5.7% at the end of Q1. Attractive opportunities exist within equities and alternative asset classes. This outlook is consistent with a ‘square root’ shaped economic recovery.

A ‘W’ or ‘U’ shaped economic recovery would put further pressure on expected returns. In a three-sigma scenario, equity returns would be lower by about 0.4-0.8% across regions compared to the 2009-repeat scenario. REITs, Infrastructure, US High Yield have significantly lower expected returns under this scenario.

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1. Long-term forecasts are based on 10-year models and should not be compared with 12-month forecasts published in the DWS CIO View. The information in this long view reflects our current views only, is subject to change, and is not intended to be promissory or relied upon by the reader. There can be no certainty that events will turn out as we have opined herein.

2. History lesson II: Estimating the dilution from a COVID -19 recession for equity investors, DWS Research Institute, April 2020

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DWS Investment GmbH as of August 2020
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