Today’s dislocations may be tomorrow’s new equilibria.
Of the climate post Brexit, they say: The negotiations may just continue in the background for a long time. In which case, Brexit fatigue may set in among investors, with more emphasis placed on the day-to-day data. If sterling were to hold on to its recent appreciation, then the squeeze on real wages, which depressed consumption in 2017, may ease significantly. If business investment is not entirely paralysed, then alongside less restrictive fiscal policy, an ongoing modest recovery seems feasible.
Our 2019 estimate for real global GDP growth of 2.5% is unchanged from last year, and despite a few country-level adjustments, the secular growth outlook is stable and risks are balanced. Asset returns at equilibrium look reasonable by historical standards, but cyclical headwinds constrain our return forecasts today and still present a challenge.
Cyclical risks are building, many economies are operating above trend with little slack, and asset valuations are elevated. While long-term investors should consider returns over the whole cycle, the starting point matters greatly to the long-term outlook. Traditional investment frameworks reflect market risk quite well but may not capture factors like illiquidity risk, which can profoundly affect asset returns late in the cycle.
Bond return forecasts improve this year, notably in the U.S., where policy normalization has created a favorable entry point. Global equity returns are unchanged, but there is some regional divergence, which may offer opportunities for investors. Alternatives are a relative bright spot, as fee reduction and improved alpha trends lend support.
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