Stormy for now, then brighter but volatile – 5-year returns forecasts

In Short

When it rains, it pours. We predicted a difficult year 2022 for asset performance, but the war in Ukraine has largely contributed to making it far worse than expected.


  • The war in Ukraine, the resurging inflation beast and aggressive monetary tightening leave markets and investors in a dense fog of uncertainty. Even after the sharp sell-off in equities and bonds over the past year, the bottom of markets may still be ahead of us.
  • Yet the longer-term return outlook looks more encouraging than in previous years, following the recent sharp market correction. This is particularly true for Fixed Income, following the sharp rebound in yields by about 250 bps in core yields and 400 bps and more for Credit and riskier sovereigns. Current yields predetermine most of the long-term income perspectives in Fixed Income. And with central banks’ terminal rates likely to land at lower levels than currently priced, we expect total returns to exceed the carry.
  • Similarly, soaring rates and the global slowdown have triggered a sharp drawdown in Equities; lower earnings yields are a reliable precursor of higher long-term returns. The upgrade in return expectations, however, is less spectacular than for  Fixed Income, as the earnings outlook is blurred by persistent headwinds to the global economy and Europe in particular.
  • USD local returns appear attractive, with the USD rally still having legs short term. Yet the USD’s gradual decline longer term from the current lofty levels requires strategic prudence. USD hedging costs are curbing much of US Credit appeal over the Europe. US Treasuries, by contrast, outshine Bunds and should prove a better hedge in adverse risk scenarios.
  • Our return forecasts have improved, but we also expect a higher volatility regime in a more challenging macro environment (QE over, secular decline in rates and corporate taxes over, deglobalisation, more volatile geopolitical order). The single biggest risk to the outlook arises from a protracted inflation overshoot that would force central banks into reckless and persistent tightening. Also, a much deeper recession near term on rising geopolitical tensions and an outright energy crunch would leave long-lasting scars to both the economy and returns on risky assets, while core bonds may regain some of their safe-haven appeal. 

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Core Matters: Stormy for now, then brighter but volatile – 5-year returns forecasts

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