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Mediocre Returns Lie Ahead: Asset Managers

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Some of the biggest investment firms are projecting very mediocre returns from bonds and stocks over the next seven to 10 years, according to Christine Benz, Morningstar’s director of personal finance.

She reviewed the forecasts of BlackRock, JPMorgan, Research Affiliates, Vanguard and Morningstar Investment Management for U.S., developed markets (excluding the U.S.) and emerging market equities, and for U.S. bonds over the medium term.

In all cases, U.S. equities trailed behind developed and emerging market equities.

JPMorgan and Research Associates were the most optimistic about emerging market equity returns, forecasting nominal gains above 7% annually, as the chart above shows  (Vanguard’s forecast also includes developed market equities.) 

BlackRock favored European equities over both emerging market and U.S. equities. Morningstar Investment Management forecast higher returns for developed market stocks over emerging market equities, but was the most pessimistic of the five firms for U.S. stocks.

Morningstar forecast a 0.10% decline in U.S. stocks over the medium term. Research Affiliates forecast a 2% gain for U.S. large cap stocks. The remaining three firms forecast yearly gains ranging from about 4% to 5.7%.

More Forecasts

Most of the firms had lowered their forecasts from Benz’s last forecast compilation in April. (JPMorgan was not included in that published report, but Benz notes it has reduced its return expectations for U.S. stocks due to higher valuations.)

Benz admits that “predicting the market’s direction, especially over the short term is tricky, and some investors might be inclined to dismiss asset return forecasts altogether.” But she stresses their “mission-critical” importance when setting up financial plans, using specific savings rates and  time horizons. 

“Low return expectations for U.S. stocks and bonds are a key reason that retirement researchers like Wade Pfau believe that new retirees should be conservative with their withdrawal percentages,” writes Benz.

Firms’ forecasts for U.S. bonds ranged from BlackRock’s forecast of roughly 0.80% to J.P Morgan’s forecast of 2.5%, which focused on investment grade corporate bonds.

JPMorgan is even more optimistic about returns for high yield bonds, 4.8%, and emerging market hard currency debt, 5.2%, according to Benz.

 

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