In this report, we present the DWS long-term capital market assumptions for major asset classes as of the end of September 2022 while exploring the risks to these forecasts.
The third quarter of 2022 was, for the most part, a continuation of the volatile market conditions and stubborn price pressures the global economy has experienced since the middle of 2021. As inflation prints remained elevated, real and nominal interest rates have continued to climb higher, weighing down on sentiment across both risk-on and risk-off financial assets. Equity returns were again negative, reflecting both an anticipated downward revisions in corporate earnings estimates and more importantly, in our estimation, the risk of a higher neutral interest rate. The real economy remains robust for now, especially through measures of labor tightness. However, the knock-on effects of higher real costs of borrowing, exacerbated by the inversion of the yield curve in many developed markets are likely to play out in the coming quarters.
Although very short-lived, the United Kingdom’s fiscal experiment jolted currency and UK gilt markets, highlighting the importance of central bank consistency and credibility. The liquidity event in the gilt market illustrates the increased use of carry and leverage across non-bank segments of the economy, and further rises in interest rates threaten to expose long borrowers and short lenders to disruptions in bond yields.
Despite these outstanding risks, in combination with continued geopolitical uncertainties in Europe and Asia, the correction in risk asset valuations and across bond yields makes investing more palatable for the patient investor. Across asset classes, the adjustment to valuations for equities and the higher starting yield levels for sovereign and corporate bonds is the largest driver of the increase in our expected ten-year return outlook.
Our models now forecast an annual return of 6.9% from the MSCI All Country World Index (“ACWI”) over the next decade, versus 5.6% three months prior. At an aggregate level, we estimate the forecasted rate of return on a diversified portfolio of assets at 6.5%, also up by 0.6ppt from the level at the end of Q2.
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