Entering 2020, the long-run return forecasts across asset classes left something to be desired. The rich valuations meant that investors could only expect low returns from most asset classes going forward. A lot has changed with the COVID-19 crisis, though. Global equity markets have experienced a significant derating amid fears of a sharp global recession. Developed market sovereign bond yields have rallied further from already low levels at the beginning of the year. The implications for asset allocators are evident if the underlying assumptions are kept unchanged. But, this may be challenging as the current economic crisis is likely to be even worse than the global financial crisis. In this report, we examine the potential impact of the ongoing crisis on DWS’s long-term capital market return assumptions.
We present three scenarios: the first (status-quo) uses the same economic growth, dividend, and credit risk assumptions that were used for our annual Long View publication from earlier this year. The forecasts under this scenario are derived by simply updating our earlier forecasts for the changes in prices and inflation forecasts observed in the first quarter. Scenarios 2 (2009-repeat) and 3 (three-sigma) are alternative scenarios changing economic growth, dividend, and credit risk assumptions with the former assuming the ongoing crisis to be of the same magnitude as the 2008 financial crisis and the latter assuming the crisis to be much worse, like a once-in-century type event.
The forecasts under our three-sigma scenario are strikingly similar to those published in our earlier report using December end prices. Given the severity of this crisis, one could argue that markets have been broadly efficient in repricing asset returns. Some differences still exist in Emerging Market (EM) Sovereigns, US Treasuries, and Euro high yield (HY), though. Those with a more sanguine economic outlook (status-quo and 2009-repeat scenarios) would find better opportunities now than at the beginning of the year, both in absolute terms and relative to Treasuries.
Click here to read the complete article.