Real estate provides a silver lining in a diversified portfolio

The recent pullback in equity prices has provided some additional headroom for valuations and means that we now forecast slightly higher returns for equities over our strategic forecast horizon. Our latest baseline forecast is a 4.2% annual return in USD terms for the global index, up from 3.4% last quarter, with 4.0% expected for advanced economies and 5.9% for EMs.

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• However, equity return forecasts continue to look very low by historic standards due to the fact that equity valuation multiples remain well above our estimates for fair value, particularly in the US, and we assume a degree of mean reversion over our strategic forecast horizon.
• The relentless repricing of the OIS curve and the reset of term premia in many core fixed income markets trimmed the share of global negative yielding government bonds to below 10% from around 50% in 2019 rendering bonds relatively attractive to investors.
• We have introduced real estate in our strategic forecasts, having recently added sectoral data to our Global Economic Model. The asset class looks attractive with global direct real estate and REITs delivering expected 5y returns of around 8% and 5.9% on average, well above our projections for bonds and equities.