We reiterate the main driver affecting the current and forward-looking macro environments is a combination of sustained inflation, mounting recession fears and geopolitical developments. Price stability has become the paramount goal and even more complicated to reach, therefore CBs will make sure high inflation will not be entrenched in economic agents’ long-term expectations. Different inflation forces are at play in US and Europe. While in the former, labour market tightness and strong demand are the key drivers, the latter is primarily affected by the energy crisis triggered by the conflict in Ukraine. Then, if the Fed has started a fast-paced quantitative tightening to bring inflation to target at any economic cost, ECB and BoE face a more arduous task as they are calibrating restrictive monetary policies in less resilient economies. Our long-term central scenario sees inflation and interest rates stabilising around higher levels than the past decade: we project that systemic shifts to a greener economy and geopolitical events (together with linked supply chains disruptions) will keep risk premiums and long-term volatility elevated. Bondholders are expected to benefit from attractive returns due to increased carry. In the medium-term, high-quality credit instruments are favoured on lower quality assets, as the uncertain outlook might increase default events. On the equity side, last quarter correction has improved starting valuations. Hence, medium-term expectations are improving versus the previous quarter although increased borrowing costs and likelihood of a recession could weigh on performance, while moving to long-term the repricing effect is more diluted.
In the table below, we present the simulated forward-looking statistics over a 10-year horizon (expected returns, volatility and CVaR) compared with historical statistics calculated on a 20-year sample. Here, CVaR and max drawdown represent the expected and historical shortfall, respectively. We also provide arithmetic average returns, which is a useful return statistic for portfolio optimisation purposes.