DWS Long View | The impact of rates on returns

Summary


Within this report, we present the DWS long-term capital market assumptions as of the end of June 2021 for major asset classes.

As the world has continued to rebound strongly from the COVID-19 crisis, global risk markets have, unsurprisingly, reacted very positively to the strong fundamental outlook. By our estimations, global growth is on pace for 5.8% in 2021 and 5.2% in 2022, and we expect inflation to run at 2.8% for this year and 2.5% in 2022. Perhaps more surprisingly, after an initial move higher in the first quarter of the year, treasury yields have rapidly reversed course, with the 10 year treasury yield ending the second quarter below 1.5%. 10 year Treasury Inflation-Index breakeven levels ("TIPS Breakevens") have rallied modestly from 2.50% at the end of March, but more drastically, the 10 year real interest rate have declined further into negative territory.

This has naturally raised questions about the normalization of interest rates through interest rate hikes, and perhaps more importantly, through the eventual tapering of asset purchases by global central banks. The Federal Reserve’s ("Fed") messaging around its plans to taper asset purchases has reduced the prospect of market volatility but has also brought to the minds of investors the question of whether real interest rates can remain persistently negative over the medium to longer term. More importantly, the question has arisen as to the implications of a persistently negative interest rate on long term financial asset returns, a topic we will explore in more detail throughout this piece.

Absent this structural negative real interest rate outlook, the strong performance in global financial markets in Q2 has reduced our base case 10 year return outlook for most asset classes. Over the past quarter, global equity markets have returned 7.1% but now present marginally more challenging valuations relative to their own history. As previously noted, the greater surprise has been the further compression in government bond yields, with the 10 year treasury yield falling from above 1.7% to below 1.5% in the second quarter.

Our models now estimate a forecasted return of 4.3% from the MSCI All Country World Index ("ACWI") annually for the next decade, less than 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 3.8% down 40 bps from the level at the beginning of the year.

Figure 1. DWS ten years annual forecasted returns

As of 30 Jun 2021
Δ since Mar 2021

S&P 500

4.7%

-0.6%

MSCI Europe

3.8%

-0.4%

MSCI UK

5.7%

-0.6%

MSCI Germany

3.5%

-0.1%

MSCI Japan

3.1%

0.5%

MSCI World

4.3%

-0.5%

MSCI EM

4.4%

-0.4%

MSCI ACWI

4.3%

-0.5%

US Treasuries

1.3%

-0.3%

Euro Agg Treasuries

-0.3%

0.0%

US Corporates

1.6%

-0.2%

Euro Agg Corporates

0.2%

0.0%

US High Yield

2.2%

-0.6%

Pan-Euro High Yield

1.4%

-0.2%

EM Sovereigns

3.9%

-0.4%

Developed REITs

4.3%

-0.3%

US REITs

4.9%

-0.5%

Global Infrastructure

5.1%

-0.3%

Americas Infrastructure

5.3%

-0.5%

Broad Commodities Futures

0.1%

-0.6%


Source: DWS Investments UK Limited. Forecasts from of 30 June 2021 to 30 June 2031.  Due to various risks, uncertainties and assumptions made in our analysis, actual events or results or the actual performance of the markets covered may differ materially from those described.

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1. MSCI ACWI generated an annualized 11.24% total return from 6/30/2011 to 6/30/2021

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