RISK TAKERS poised for rewards in 2016 as "safe " assets
lose lustre .
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The investment scales are tipping in favour of investors willing to take more risk as the gap between returns on relatively safe asset classes and riskier ones , widens .
This view is based on a multi-decade set of assumptions for returns , volatility and correlations that underlie the economic and capital market estimates we have been making for the past 20 years . These have stood the test of time : our predictions from 2004 closely resembled the actual investment experience of a balanced investor since then to the end of 2014 .
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On the face of it , the changes we foresee in 2016 versus 2015 are relatively modest .
We are forecasting a continuation of low inflation and subdued long-term growth in the face of what are increasingly divergent cyclical forces across economies globally .
Real economic growth in developed markets should average 1.75 % over the next decade , down slightly from last year on the back of demographic trends and narrower output gaps .
Whereas developed markets seem to be emerging from a multiyear deleveraging cycle that has depressed growth , emerging market economies are transitioning from a credit boom into their own deleveraging cycle .
These contrasting dynamics imply a considerable growth gap over the next several years , suggesting that central bank monetary policy in major developed and EMs will be more divergent than at anytime in the past 20 years .
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Against this backdrop , return expectations for the balanced investor have actually edged higher , interrupting what had been a multiyear downward trend of sagging economic projections weighing on expected market returns .
Despite the marginal improvement this year , we are still expecting 6% average returns for balanced investors over the next 10 to 15 years.
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In fixed income , cash returns will struggle to exceed the rate of inflation in light of continued accomodative central bank policy and lower real yields , while investors in longer duration US treasuries will need a lot of patience to earn just a small premium over cash . The findings are even more sobering when analysing the return projections for government debt in the UK and the Euro area .
Against this dim outlook , high-yield debt should stand out as a comparative bright spot .
Meanwhile , value is appearing in EMs' debt as economies rebalance , arresting a downward slippage in credit fundamentals .
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In global equities , the return outlook for developed markets is still disappointing at 6,75 % in local currency terms , constrained by relatively low earnings growth and elevated valuations .
The picture is a bit better for US equities on the back of less challenging valuations and lower margins .
Still , buyback activity is likely to continue to mask subdued earnings growth as companies return cash to shareholders to prop up the return on equity .
The outlier equity market is Japan , which defies projections .
Future returns will depend significantly on the success of corporate governance reform and the effective implementation of the third arrow of Abenomics .
EM equities are increasingly hard to group together , given growing regional differentiation , but average return prospects for the eight largest countries have ticked up to 9,75 % in local currency terms . It reflects higher top-line revenue growth compared with developed markets and valuations that are moderately attractive in aggregate .
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In alternatives , public markets drive approximately 70 % of
private - equity returns and as much as 90 % for certain hedge fund strategies , such as equity long/short .
However , we also assume that higher volatility will play more into the hands of hedge fund managers , in the next few years .
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The salient point here is that , while the overall return environment is broadly unchanged , the balance between risk and return is subtly shifting .
Return expectations for riskier assets are improving as those for
" safe " assets worsen . Investors with the stomach for volatility can capture these by reducing exposure to intetest rate-sensitive assets and increasing their holdings of equities , credit and alternative assets .
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CONCLUSION ( and the blogger's point of vew to all above quoted by Mike O'Brien and Jed Laskowitz ) : Well , in general
I agree , still who can ignore the serious geopolitic tensions in many corner of this planet...
I strongly believe that most of them are extremely dangerous and can effect brutally all estimations on the markets .
Key points as well can be the volatility in currency markets and
how long commoditiy prices will stand from their current lows .
Especially , oil prices ( now at 11 (!) years low ) , if reversed can change the whole picture dramatically !
AND TWO WORDS , on the struggling Greek economy ( now at its 6th year of misery ) : It seems quite unfair to MY EYE , that our great country is in the middle of a storm around its huge debt which clearly explains why it takes so long to be be helped into unloading a significant amount of it .
Delays in reforms in the country , are only half the answer to
the problem .
But what happens really with the other half ?
Afterall , speculalation against an entire country's debt , is not the wiser thing ......
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