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Low returns ahead

KEY TAKEAWAYS

Broad market returns are likely to be lower than in recent history. As such, investors should pick their positions carefully as markets separate winners from losers.

The second half begins with a good news/bad news scenario of sorts. The good news: Fears of a global recession have subsided. Growth in the U.S. has started ticking higher, according to a BlackRock analysis that suggests U.S. gross domestic product (GDP) forecasts have fallen too far. We see emerging markets stabilizing as the Federal Reserve (Fed) keeps rates on hold for longer, and a credit boom in China boosting growth in the near term.

LIVING IN A SLOWER, GRAYING WORLD
GDP Growth and % of Population Over Age 65, 1987–2018

Graph: Living in a slower, graying world
Sources: Thomson Reuters Datastream and BlackRock Investment Institute, June 13, 2016. Note: Blue bars show range over yields from highest to lowest over the past 10 years. (Highs and lows are labeled.) Light blue line shows average over that period. Green dots are the current yield.

The bad news: Aging populations and a poor growth outlook in the eurozone, particularly since the UK vote to leave the European Union (EU), are key factors restraining economic growth. This has perpetuated the easy global monetary policy that is serving to keep bond yields in the gutter and push investors toward higher-yielding assets.

INTEREST RATES GLOBALLY ARE AT ROCK BOTTOM
10-Year Government Bond Yields Over the Past Decade

Interest rates globally are at rock bottom
Sources: Thomson Reuters Datastream and BlackRock Investment Institute, June 13, 2016. Note: Blue bars show range over yields from highest to lowest over the past 10 years. (Highs and lows are labeled.) Light blue line shows average over that period. Green dots are the current yield.

Stock prices, in turn, have gotten ahead of fundamentals, leaving little room for future appreciation. With valuations across stocks and bonds ranging from fair to high to very high, easy and outsized investment returns will remain hard to come by.

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