Capital Markets Assumptions for the Decade Ahead

QMA expects lower U.S. equity, stronger U.S. bond, and healthier commodity returns over the next 10 years

April 14, 2019

QMA expects real economic growth in the developed economies to continue to moderate over the next decade, as it has for the last 30 years. In its 2019 Capital Market Assumptions PDF opens in a new window , QMA’s Global Multi-Asset Solutions team explains why it believes growth of the developed labor force is limited by domestic demographics, with no expectation for a significant offset from improved productivity growth. Inflation in developed markets, in contrast, is anticipated to increase modestly over the next 10 years, relative to the low rates of inflation observed since the onset of the global financial crisis of 2008. QMA expects real economic growth and inflation in emerging markets to advance at higher annualized rates. Younger populations and higher rates of return on capital in emerging markets are driving higher rates of nominal economic output compared to developed market peers.

Equities: Stronger equity returns seen outside of the U.S.

QMA’s 10-year annualized forecast for global equities is 7.9%, boosted in part from an improvement in valuations at the end of 2018 as global equities (as measured by the MSCI World Index) fell 13% in the final quarter. Its long-term return forecast for U.S. equities is somewhat lower, at 7.1%. Developed market equities outside of the U.S. are forecast at 9%, a differential largely accounted for by lower historical valuation ratios outside of the U.S. QMA’s long-run forecast for emerging market equities is 8.9%, with higher rates of nominal economic growth offset somewhat by comparably lower expected income returns than in developed markets.


Fixed Income: Better returns expected from U.S. versus global bonds

Global sovereign interest rates began 2019 near historic lows for a number of developed economies that continued to provide central bank stimulus through 2018. With a very low starting point for initial income returns, QMA’s long-run forecast for unhedged global aggregate bonds is 2%. In contrast, its long-run forecast for U.S. aggregate bonds is 4%, with initially higher yields. Over the next 10 years, QMA expects the U.S. central bank’s policy rate to average approximately 2.4%, the same rate it finished at in 2018. Outside the U.S., developed market central banks are forecast to modestly increase policy rates, as some policy normalization is expected. In U.S. credit markets, QMA is forecasting only modest adjustment in average spread levels over the next 10 years, contributing to expected returns of 5.0% and 6.8% for U.S. investment-grade and high yield bonds, respectively.


Real Assets: Returns anticipated to outpace U.S. inflation forecast rate

QMA’s 10-year return expectation is for real assets (which include commodities, REITs, and TIPS) to outpace the forecast rate of U.S. inflation. For U.S. TIPS, it assumes that expected inflation and break-even inflation converge over time, implying that the inflation risk premia and liquidity risk premia in TIPS offset each other. Under these assumptions QMA forecasts a long-term return from TIPS of 3.7%, which is slightly above the expected return to U.S. Treasuries, given the slightly higher duration of U.S. TIPS. With valuations for both U.S. and global REITs at the end of 2018 being judged as inexpensive relative to longer-term expectations, QMA revised its estimates upward to a long-run forecast for U.S. REITs of 8.1%, and 8.2% for global REITs. The long-run expected return for commodities is 3.4%, reflecting a return on cash investment of 2.4%, assuming investment through liquid futures, and a growth premium of 1%, consistent with historical spot returns over cash.

Return comparison by asset class (%)




QMA 10-year expected returns

Prior 10-year returns

QMA forecast vs. historical return









Developed ex-U.S.




EM Equities




Japan Equities




Europe ex U.K.




Global Equities




U.S. Small Cap




U.S. Equities








U.S. High Yield




U.S. Investment Grade




U.S. Aggregate




U.S. Treasury




Global Aggregate




Global Treasury








Developed REITs

















Source: QMA, Morningstar as of 12/31/18. Indices used to represent asset classes for prior 10-year returns: U.S. Equities: S&P 500 Index; U.S. Small Cap Equities: Russell 2000 Index; Global Equities: MSCI ACWI Index; Europe ex UK Equities: MSCI Europe Ex UK Index; Japan Equities: MSCI Japan Index; Emerging Markets Equities: MSCI EM Index; Developed Equities: MSCI World ex U.S. Index; UK Equities: MSCI United Kingdom Index; Global Treasury: Bloomberg Barclays Global Treasury Index; Global Aggregate: Bloomberg Barclays Global Aggregate Index; U.S. Treasury: Bloomberg Barclays U.S. Treasury Index; U.S. Aggregate: Bloomberg Barclays U.S. Aggregate Bond Index; U.S. Investment Grade: Bloomberg Barclays U.S. Corporate Bond Index; U.S. High Yield: Bloomberg Barclays U.S. Corporate High Yield Index; Commodities: Bloomberg Commodity Index; U.S. TIPS: Bloomberg Barclays U.S. Treasury U.S. TIPS Index; U.S. REITs: FTSE EPRA NAREIT United States Index; Developed REITs: FTSE EPRA NAREIT Developed Index.

Bloomberg Barclays Global Aggregate Index is an unmanaged index of global investment-grade fixed income markets. The three major components of this index are the U.S. Aggregate, the Pan European Aggregate, and the Asian Pacific Aggregate indices. The index also includes Eurodollar and Euro-yen corporate bonds, and Canadian government, agency, and corporate securities. Bloomberg Barclays Global Treasury Index tracks fixed rate, local currency government debt of investment-grade countries, including both developed and emerging markets. Bloomberg Barclays US Aggregate Bond Index represents securities that are SEC registered, taxable, and dollar denominated. It covers the U.S. investment-grade, fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities. Bloomberg Barclays US Corporate Bond Index is an unmanaged index is the corporate component of the U.S. Credit Index and covers publicly issued U.S. corporate and specified foreign debentures and secured notes that meet the specified maturity, liquidity, and quality requirements. The corporate sectors are Industrial, Utility, and Finance, which include both U.S. and non-U.S. corporations. The non-corporate sectors are Sovereign, Supranational, Foreign Agency, and Foreign Local Government. Bloomberg Barclays US Corporate High Yield Index covers the USD-denominated, non-investment grade, fixed rate, taxable corporate bond market. Securities are classified as high yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below. A small number of unrated bonds are included in the index. The index excludes emerging markets debt. Bloomberg Barclays US Treasury Index includes all publicly issued, U.S. Treasury securities that have a remaining maturity of 10 or more years, are rated investment grade, and have $250 million or more of outstanding face value. Bloomberg Barclays US Treasury US TIPS Index is an unmanaged index that consists of inflation-protected securities issued by the U.S. Treasury. Bloomberg Commodity Index is composed of futures contracts and reflects the returns on a fully collateralized investment in the BCOM. This combines the returns of the BCOM with the returns on cash collateral invested in 13 week (3 Month) U.S. Treasury bills. FTSE EPRA NAREIT Developed Index is a composite of the existing EPRA Europe Index, EPRA/NAREIT North America Index, and EPRA/NAREIT Asia Index. The index contains publicly quoted real estate companies that meet the EPRA Rules in 25 countries throughout Europe, North America, and Asia. FTSE EPRA NAREIT United States Index is a subset of the EPRA/NAREIT Global Index and the EPRA/NAREIT North America Index and contains publicly quoted real estate companies that meet the EPRA Ground Rules. EPRA/NAREIT Index series is seen as the representative benchmark for the real estate sector. 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. MSCI Emerging Markets (EM) Index is an equity index covering 23 countries representing 10% of world market capitalization. The Index is available for a number of regions and market segments/sizes and covers approximately 85% of the free float-adjusted market capitalization in each of the 23 countries. MSCI Europe Ex UK Index captures large and mid-cap representation across 14 Developed Markets (DM) countries in Europe. The index covers approximately 85% of the free float-adjusted market capitalization across European Developed Markets excluding the UK. MSCI Japan Index is designed to measure the performance of the large and mid- cap segments of the Japanese market. The index covers about 85% of the free float-adjusted market capitalization in Japan. MSCI United Kingdom Index is designed to measure the performance of the large and mid-cap segments of the UK market. The index covers about 85% of the free float-adjusted market capitalization in the UK. MSCI World ex US Index captures large and mid-cap representation across 22 of 23 Developed Markets (DM) countries, excluding the United States. The index covers approximately 85% of the free float-adjusted market capitalization in each country. Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index. S&P 500 Index is an unmanaged index of 500 common stocks of large U.S. companies, weighted by market capitalization. It gives a broad look at how U.S. stock prices have performed. 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.

1019615-00001-00 Ed.04/2019


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