Expected returns heading down
Despite the volatility and ructions that have characterised the global financial arena over the past six months, the outlook for medium-term returns from most asset classes remains largely unchanged – and low from a historic perspective, according to Peter Brooke, Head of OMIGSA MacroSolutions. “This is because the macro themes we first named in 2010 continue to play out on the world stage and, in fact, have intensified,” he explains.
The first theme, from which all that follows, is that of Big Government, which is super evident in the more than US$6 trillion in excess leverage in the developed world. This tragedy is front and centre of the world’s attention, with the Eurozone debacle at its epicentre.
“We don’t see an easy solution to this,” says Brooke, “and we tend to agree with Mervyn King’s view that we are only half-way through this mess. The macro-growth environment has deteriorated to a greater degree than we had expected. This has resulted in lower GDP growth and earnings expectations. A silver lining is that expectations have now rebased to a very low level and, by year end, should be troughing. This means that the market can then look forward to an improvement.”
For now, though, the result remains that investors can continue to expect below-trend economic growth, continued political turmoil and volatile markets. The consequence of the excess leverage is exceptionally low interest rates globally, which reinforces the themes ‘cash is trash’ and the ‘quest for yield’.
These exceptionally low rates have led to a desperate hunt for yield by investors, which has seen many bond markets trading at unprecedented low yields. In Switzerland, nominal bond yields are negative out to five years, while in Denmark the interbank lending rate is currently pegged at -2 bps, which effectively means that you have to pay a Danish bank to keep your cash.