Alain Kerneis, Head of Strategy and Market Views within Client Solutions, discusses key considerations for long-term investors.
In this issue we focus on the following three key areas:
We have modestly revised down our five-year real GDP growth forecasts for advanced economies due to lower US growth. In equities, valuations and low earnings growth may limit future returns. We have also lowered our five-year fixed income forecasts broadly, reflecting the fall in yields in the past quarter.
We believe equities will outperform fixed income over five years, and private market assets may allow valuable incremental returns in a low return environment. Investors with liabilities should have material hedge ratios. Now is a good time to remove inflation risk. We construct our portfolio by combining stable, long-run views with dynamic tilts to reflect current market conditions.
Taking leverage through government bonds is more expensive and has higher roll risk than before. Pension funds should diversify their sources of leverage. For certain investors, obtaining leveraged exposure to equity is cheaper than obtaining leveraged exposure to government bonds. Equity total return swaps can arguably reduce roll risk.
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