Capital Market Assumptions 2024

Towards a reordering of asset class profiles

Equity returns are expected to be marked by moderate earnings growth and decreased valuation multiples. The significant price increases in EM regions and the US over the latest quarter is negative for future returns. Government bonds see some improvements in their expected returns driven by higher starting yield levels. On the other hand, credit bonds are mostly unchanged.

Risk/Return Trade off

The capital market line remains flat, confirming that it can be challenging to reach high return targets using liquid assets alone. Real and alternative assets need to be considered for allocations with a more aggressive risk profile, due to their diversification and return-generation features. Fixed-income assets remain fundamental to guarantee stable income in multi-asset portfolios.

Return Contributions

The long-term outlook for government bonds has slightly improved amid increased interest rates over the quarter: higher carry and more favourable valuations in particular for UK, Japan and Euro Semi Core and Peripheral bonds. US and Euro Core bonds’ returns are unchanged.

Changes in equity’s expected returns are mainly driven by valuations, while estimates regarding EPS growth are almost unchanged. Hence, what is driving the expected return differences compared to last quarter is mainly the valuation component.

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