Capital Market Assumptions - Q1 2018

By BlackRock Investment Institute

We have upgraded our expectations for US and eurozone growth in our updated capital market assumptions (CMAs). We also dig into our outlook for global yield curves after the most recent bout of curve flattening in the US. We then show our five-year expectations for excess equity returns over cash.

Capital at risk. All financial investments involve an element of risk. Therefore, the value of the investment and the income from it will vary and the initial investment amount cannot be guaranteed.

Quarterly update

  • The US yield curve has flattened over much of the past year, spooking some investors along the way. Yet we see this move as a natural consequence of the structural factors limiting how high interest rates can rise relative to the past. On a five-year horizon, we see scope for long-term Treasury yields to climb mostly in line with short-term yields. This suggests the yield curve’s current shape should remain fairly steady – even if the path higher might be a bumpy one.
  • We have raised our five-year expectations for US gross domestic product growth to 2.25% (from 2.0%) due to the fiscal stimulus provided by the tax overhaul and a possible increase in government spending. We also raised our eurozone growth forecast to 1.5% from 1.25% due to improved long-run trend growth. That resulted in higher expected returns for real estate, but richer valuations overwhelmed the potential return boost for equities.
  • We compare our expected US and eurozone equity returns with cash and reaffirm our preference for equities on a five-year horizon. Even with the rise in valuations, expected excess returns remain in the US and are higher in Europe. We lay out our thinking on how structurally lower interest rates shape our assessment of equity valuations. We have raised our return expectations for emerging market (EM) stocks after bringing our valuation methodology for this asset class in line with how we calculate fair value for developed market (DM) equities.
  • We return expectations for DM equities have dropped after the broad gains in the fourth quarter pushed valuations higher. Our return outlook for government bonds and investment grade credit is unchanged, but return expectations on long-dated bonds fell further. We see negative returns on government bonds in many regions over the next five years. This means equities and private market assets look more attractive on a relative basis, in our view. The asset allocation breakdown in our model portfolios has not changed this quarter as the relative return and risk outlook is broadly the same.

Open interactive tool

Op zoek naar meer onderzoek en insights?


BlackRock’s Long-Term Capital Market Assumption Disclosures: This information is not intended as a recommendation to invest in any particular asset class or strategy or product or as a promise of future performance. Note that these asset class assumptions are passive, and do not consider the impact of active management. All estimates in this document are in US dollar terms unless noted otherwise. Given the complex risk-reward trade-offs involved, we advise clients to rely on their own judgment as well as quantitative optimisation approaches in setting strategic allocations to all the asset classes and strategies. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Assumptions, opinions and estimates are provided for illustrative purposes only. They should not be relied upon as recommendations to buy or sell securities. Forecasts of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. If the reader chooses to rely on the information, it is at its own risk. This material has been prepared for information purposes only and is not intended to provide, and should not be relied on for, accounting, legal, or tax advice. The outputs of the assumptions are provided for illustration purposes only and are subject to significant limitations. “Expected” return estimates are subject to uncertainty and error. Expected returns for each asset class can be conditional on economic scenarios; in the event a particular scenario comes to pass, actual returns could be significantly higher or lower than forecasted. Because of the inherent limitations of all models, potential investors should not rely exclusively on the model when making an investment decision. The model cannot account for the impact that economic, market, and other factors may have on the implementation and ongoing management of an actual investment portfolio. Unlike actual portfolio outcomes, the model outcomes do not reflect actual trading, liquidity constraints, fees, expenses, taxes and other factors that could impact future returns.

Index Disclosures: Index returns are for illustrative purposes only and do not represent any actual fund performance. Index performance returns do not reflect any management fees, transaction costs or expenses. Indices are unmanaged and one cannot invest directly in an index.

General Disclosure: This material is prepared by BlackRock and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of February 2018 and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This material may contain ‘forward looking’ information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader.

In the EU issued by BlackRock Investment Management (UK) Limited (authorised and regulated by the Financial Conduct Authority). Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Registered in England No. 2020394. Tel: 020 7743 3000. For your protection, telephone calls are usually recorded. BlackRock is a trading name of BlackRock Investment Management (UK) Limited. This material is for distribution to Professional Clients (as defined by the FCA Rules) and Qualified Investors and should not be relied upon by any other persons. For qualified investors in Switzerland, this material shall be exclusively made available to, and directed at, qualified investors as defined in the Swiss Collective Investment Schemes Act of 23 June 2006, as amended. Issued in the Netherlands by the Amsterdam branch office of BlackRock Investment Management (UK) Limited: Amstelplein 1, 1096 HA Amsterdam, Tel: 020 – 549 5200. In Dubai: This information can be distributed in and from the Dubai International Financial Centre (DIFC) by BlackRock Advisors (UK) Limited ‒ Dubai Branch which is regulated by the Dubai Financial Services Authority (“DFSA”) and is only directed at ‘Professional Clients’ and no other person should rely upon the information contained within it. Neither the DFSA or any other authority or regulator located in the GCC or MENA region has approved this information. This information and associated materials have been provided for your exclusive use. This document is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution would be unlawful under the securities laws of such. Any distribution, by whatever means, of this document and related material to persons other than those referred to above is strictly prohibited. In Singapore, this is issued by BlackRock (Singapore) Limited (Co. registration no. 200010143N) for use only by institutional investors as defined in Section 4A of the Securities and Futures Act, Chapter 289 of Singapore and should not be relied upon by or redistributed to any other persons in Singapore. In Hong Kong, this is issued by BlackRock Asset Management North Asia Limited and has not been reviewed by the Securities and Futures Commission of Hong Kong. This material is for distribution to "Professional Investors" (as defined in the Securities and Futures Ordinance (Cap.571 of the laws of Hong Kong) and any rules made under that ordinance.) and should not be relied upon by any other persons or redistributed to retail clients in Hong Kong. In Latin America and Iberia, this material is for educational purposes only and does not constitute investment advice nor an offer or solicitation to sell or a solicitation of an offer to buy any shares of any fund (nor shall any such shares be offered or sold to any person) in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities law of that jurisdiction. If any funds are mentioned or inferred to in this material, it is possible that some or all of the funds have not been registered with the securities regulator of Argentina, Brazil, Chile, Colombia, Mexico, Panama, Peru, Portugal, Spain, Uruguay or any other securities regulator in any Latin American country and thus might not be publicly offered within any such country. The securities regulators of such countries have not confirmed the accuracy of any information contained herein. The information provided here is neither tax nor legal advice. Investors should speak to their tax professional for specific information regarding their tax situation. Investment involves risk including possible loss of principal. International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation, and the possibility of substantial volatility due to adverse political, economic or other developments. These risks are often heightened for investments in emerging/developing markets or smaller capital markets.

©2018 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners