Q2 2019 Capital Markets Assumptions

QMA offers second quarter expectations for asset class returns over the next 10 years

June 28, 2019

In their Q2 2019 Capital Markets Assumptions, QMA’s Global Multi-Asset Solutions team takes into account richer equity valuations, declining sovereign interest rates, and higher cash return expectations. Below is a summary of QMA’s changes to their 10-year return expectations for various asset classes.

A glance at QMA’s asset class views as of 3/31/2019


A glance at QMA’s asset class views as of 3/31/2019
  QMA 10-Year Return Estimates Change from Previous Quarter Rationale
Fixed Income      
U.S. Treasury 2.6   Our long-run forecast for U.S. aggregate bonds is consistent with higher initial yields in the U.S. We expect the U.S. central bank’s policy rate to average approximately 2.8% over the next 10 years, roughly 0.4% higher than the current policy rate. In U.S. credit markets, we forecast modest upward adjustments in average spread levels over the next 10 years.
U.S. Aggregate 3.1  
U.S. Investment Grade 3.4  
U.S. High Yield 5.3  
Global Treasury (Hedged) 2.2   After falling sharply to close 2018, global sovereign interest rates declined further in the first quarter of 2019, resulting in a reduction of our long-run forecast returns for fixed income investments. Outside the U.S., developed market central banks are forecast to modestly increase policy rates, as some policy normalization is expected.
Global Aggregate (Hedged) 2.3  
Global Equities 6.9   The significant advance in global equities in the first quarter of 2019, taking the MSCI ACWI to a year-to-date gain of better than 12%, has resulted in a negative adjustment in expected returns for global equities in general.
U.S. Equities 6.1   While the earnings growth component of the 10-year U.S. equity return forecast is 4% (1.7% attributable to U.S. real annualized GDP growth and 2.3% to inflation), there is a negative expected long-term valuation adjustment of 1.3% per year (attributable to historically elevated valuation ratios).
U.S. Small Cap 6.6  
Developed ex-U.S. 8.3   With still relatively cheap historical valuation ratios in developed markets outside the U.S., 10-year real GDP growth expectations for developed markets outside the U.S. are 1.3%, with inflation to average 1.7%, providing nominal earnings growth of 3.0%, a decline of 0.2% from the end of 2018.
Europe ex-U.K. 7.5  
U.K. 9.0  
Japan Equities 8.4  
EM Equities 7.6   We expect higher rates of nominal economic growth in emerging markets to be offset somewhat by comparably lower expected income returns in developed markets and a negative expected valuation adjustment.
Real Assets      
Commodities 3.7   Our forecast reflects a return on cash of 2.6% (assuming investment through liquid futures) and a growth premium of 1.1%, consistent with historical spot returns over cash. This forecast is a 0.3% increase from the end of 2018, primarily attributable to an increase in the expected return to cash.
U.S. TIPS 2.8   We expect inflation and break-even inflation to converge over time, yielding a return slightly above our expected return to U.S. Treasuries, given the slightly higher duration of U.S. TIPS. We expect a greater estimated negative valuation adjustment from higher future long-term real interest rates.
U.S. REITs 6.8   Valuations for both U.S. and Global REITs are still judged to be inexpensive relative to longer-term expectations. We expect a positive valuation adjustment of 0.4%, after adjusting for lower future dividend yields. We revised our long-run forecast for both U.S. and Global REITs down from over 8% at the end of 2018, when valuation adjustments contributed even more positively to expected returns.
Developed REITs 6.8  

Source: QMA as of 3/31/19.

For more details, read the full Q2 2019 Capital Markets Assumptions, which is available for financial professionals.



MSCI All Country World (ACWI) Index is a market capitalization-weighted index designed to provide a broad measure of equity-market performance throughout the world. The MSCI ACWI is maintained by Morgan Stanley Capital International, and is comprised of stocks from both developed and emerging markets. An investment cannot be made directly in an index. Past performance is no guarantee of future results.

The views expressed herein are those of QMA at the time the comments were made and may not be reflective of their current opinions and are subject to change without notice. Neither the information contained herein nor any opinion expressed shall be construed to constitute investment advice or an offer to sell or a solicitation to buy any securities mentioned herein. This commentary does not purport to provide any legal, tax, or accounting advice. Certain information in this commentary has been obtained from sources believed to be reliable as of the date presented; however, we cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. The information contained herein is current as of the date of issuance (or such earlier date as referenced herein) and is subject to change without notice. Each manager has no obligation to update any or all such information, nor do we make any express or implied warranties or representations as to the completeness or accuracy.

Certain information contained herein may constitute “forward-looking statements” (including observations about markets and industry and regulatory trends as of the original date of this document). Due to various risks and uncertainties, actual events or results may differ materially from those reflected or contemplated in such forward-looking statements. As a result, you should not rely on such forward-looking statements in making any decisions. No representation or warranty is made as to future performance or such forward-looking statements.

1022991-00001-00 Ed: 06/19


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