Multi-year return outlook continues to favour diversified equities—this sense is further accentuated when compared to low-yielding, high-quality bonds and liquidity. Many investment managers anticipate that global equities will deliver 7%–8% growth annually over the next five years.
Due to its favourable risk-return trade-off and its deleveraging lead, the US markets are expected to attract a significant share of equity allocation in a diversified portfolio. It is expected that the US markets will return an estimated 6%-7% per year. Investment managers will also favour Europe and the emerging markets allocating significant positions, and given their higher earnings yields both have slightly greater potential than the US. At the same time, history has taught us that both expected and unexpected hurdles will need to be overcome for global equities to deliver the expected returns.
The pace of economic convergence suggests that the growth advantage emerging markets have enjoyed will continue to wane over the next 5-10 years. The political and regulatory progress in emerging markets will see them inch closer to those prevalent in developed markets. This process, however, remains uneven. China and the current account deficit countries desperately need to reform their economic and financial markets, especially as global liquidity conditions are likely to turn less favourable in the coming years.