Capital Market Assumptions 2024

Towards a reordering of asset class profiles

On average, 10-year expected returns are slightly lower compared to last year’s forecasts, particularly for Developed Market equities. After last year’s strong comeback, the long-term view on government bonds remains positive.

EM Debt, Hedge Funds and Private Debt are the asset classes offering the most appealing return potential with low to medium levels of uncertainty (measured by the width of the bar in the chart).

EM Equity and Private Equity stand out in the search for the asset class with the highest return potential, however with additional risks.

Risk/Return Trade off

The capital market line remains flat, confirming that it can be challenging to achieve high returns using only liquid assets. Real and alternatives are needed for dynamic allocation due to their diversification and return-generation features. Fixed-income assets maintain their role as the fundamental building blocks of multi-asset portfolios.

Return Contributions

The long-term outlook for government bonds has slightly improved, with the exception of Chinese and Italian bonds, thanks to higher carry and more favourable valuations. Higher Treasury valuations should favour US Investment Grade credit, whereas High Yield has deteriorated due to lower expected future carry. Euro Investment Grade and Emerging Market debt are broadly unchanged.

In equities, lower expected returns are mainly driven by stretched valuations, particularly in the US, as EPS growth is substantially unchanged. Emerging Market and Pacific ex-Japan equities have benefitted the most from recent market movements, while other Developed Markets (notably Japan) could see a decrease in expectations.

Strategic asset allocation

From an asset allocation perspective, and in light of last year’s strong comeback, we continue to see fixed income as a key engine for portfolio returns, in particular for investors with a moderate risk profile (around 6% volatility target).

Given the higher equity volatility compared to recent decades, investors will need to seek additional sources of diversification, such as Emerging Market Debt.

Real and alternative assets will be key to enhance portfolio risk-return profiles, deserving around 20% allocation for dynamic risk profile investors (around 12% volatility target).

Delays in climate policy and rising geopolitical tension point towards a disorderly transition. The higher costs of the transition will be deferred to later years. The overall transition path is getting riskier as delays increase physical risks. Productivity gains from AI may help to marginally offset some of the economic impact of the transition. We expect AI adoption to be gradual as social and energy costs will also need to be assessed.

Growth and Inflation paths