The Dutch manager Robeco has published today its annual report on future profitability prospects, which covers the period 2023-2027. The strong increase in inflation has clearly deteriorated return expectations. For the firm’s experts, “maintaining real purchasing power in a globally diversified portfolio is going to be very complicated.”
A globally diversified portfolio of stocks and bonds will have a real return of -2.9% per year when annual inflation is above 4%. “Inflationary periods are by far the worst in terms of investors’ purchasing power,” the study’s authors explain.
“This presents a clear challenge for portfolio diversification.” Robeco forecasts suggest that prices will increase annually in the next five years between 2.5% and 5%, in developed countries. With these inflationary levels, the Stock Market and fixed income tend to behave in parallel, which is why Robeco recommends incorporating some alternative assets “to cover the risk of variable income”.
For the stock market, its developed profitability forecast is 4%, annualized, for the next five years. And 5.25% in emerging equities. That with inflation close to 3%, real returns will be greatly diminished.
In government bonds with the highest quality, in euros, Robeco predicts an average annual return of -0.5%. For high-quality corporate issues, their expected return is just 0.75%.
Another result of the Robeco study is that those investors who have their portfolios denominated in dollars will have much better returns. Investment in the Stock Market would yield 7.25% in developed markets, if the reference currency is the dollar. And the return on high-quality sovereign bonds would be 3.25%.
In addition, the report notes that “For investors with an international portfolio whose currency is the US dollar, the outlook is more encouraging, as other currencies are expected to appreciate against the dollar and the greenback bull market reaches its end in the next five years.
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