Structural factors have dented economic growth potential, limiting the extent to which real yields can rise. We envisage greater potential rewards for taking risk in equities, emerging market assets and alternatives.
Economic boom times look unlikely to return. While our economic view is comparatively optimistic, the global economy’s capacity for rapid growth looks to have been severely dented. Ageing populations, weak productivity growth and excess savings are conspiring to deprive many economies of the raw ingredients they need to fuel a major upswing. This will invariably suppress potential investment returns.
US trend growth, 1961-2016
Sources: BlackRock Investment Institute and Federal Reserve, December 2016.
Notes: The chart shows trend GDP growth broken down by contribution.
Opportunities exist, but expectations will need to be tempered. Risk-free income has vanished and large cap US equities look unlikely to post outsized gains. However, investors willing to wade out of the very safest asset classes look liable to be fairly compensated, in our view. Those unwilling – or unable – to accept low-single digit returns on balanced portfolios in the coming years may want to question the drivers of their conservatism and consider a more eclectic, diversified investment approach.