Rethinking returns

By BlackRock Investment Institute

We believe structurally lower growth and interest rates mean that comparing valuation metrics to past levels may not be a
good guide to the future.

Richard Turnill, Global Chief Investment Strategist, explains the rethinking returns theme.

Expectations in the US of imminent fiscal stimulus and infrastructure spending sent the 10-year Treasury yield soaring in early 2017 only to fall back over the course of the year. While we still believe bond yields will march higher over time, structural factors such as ageing populations and high debt levels should cap any yield rise to levels well below pre-crisis norms. Naturally, it could be a bumpy road along the way.

Developed market real rates, neutral rates and trend growth, 1992-2017

Market rates

Sources: BlackRock Investment Institute, with data from the Federal Reserve, U.S. BEA, Eurostat, Statistics Canada and Japan Cabinet Office, July 2017. Notes: This chart shows the GDP-weighted averages of 1 estimates of the neutral rate, called r*; 2 estimates of trend GDP growth rates, and; 3 the real short-term rate for the U.S., Japan, eurozone, UK and Canada. Data are through February 2017. For more details, see our Global macro outlook of November 2016 at blackrock.com/corporate/en-zz/literature/whitepaper/bii-global-macro-outlook-november-2016.pdf.

This has an important equity market corollary. If, as we believe, bond yields remain low, financial logic suggests valuations on stocks could remain elevated for some time: a lower discount rate applied to future earnings will simply elevate their present value. And earnings momentum is strong across the world. This means stocks can sustain seemingly lofty multiples for longer than expected as long as bond yields are held down.



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