In this report, we present the DWS long-term capital market assumptions for major asset classes as of the end of June 2022 while exploring the risks to these forecasts.
Global financial markets continued to experience elevated volatility during the second quarter of 2022. Persistent inflationary pressures forced global central banks towards monetary tightening, which in turn pulled forward the risks of a global recession. While interest rates moved higher, weakening economic data and declining consumer sentiment weighed on risk markets. Furthermore, the ongoing war in Ukraine continues to threaten economic disruption in Europe.
The resulting weakness in both risk-on and risk-off assets has improved the longer-term prospects for investment returns in nominal terms. Real interest rates across developed economies are now moving toward, or back in, positive territory for the first time since before the COVID-19 crisis, and valuations on equities and credit pose less of a hurdle to strategic investors. Hence, our core set of nominal return expectations for the next decade are higher versus the previous quarter.
However, theses higher return forecasts are accompanied by higher uncertainty. The potential for a ‘new normal’ across geopolitical, environmental, and macroeconomic landscapes are increasingly important considerations to our outlook over the coming decade. While these nascent longer-term trends do not feed into our return forecasts yet, exploring these risks is prudent and, therefore, the theme of this newsletter.
Our models now forecast an annual return of 6.6% from the MSCI All Country World Index (“ACWI”) over the next decade, versus 5.6% three months prior. At an aggregate level, we estimate the forecasted rate of return on a diversified portfolio of assets at 5.9%, also up by one percentage point from the level at the end of Q1[1].
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