The structural demand for safe haven assets will remain high, thus keeping bond yields low relative to historic norms. Diminishing demand for safe havens associated with slower official reserve accumulation will likely be offset by demand from banks adjusting to new regulations as well as from private investors in countries with aging populations, according to the 58th edition of the Barclays Equity Gilt Study.
The ‘tail risks’ associated with the 2008-09 financial collapse have largely receded, resulting in a low-risk, low-return environment for investors who face far more challenging valuations and diminished prospective investment returns.
Furthermore, the investment environment will be driven by two transitions in the next five years – the eventual normalisation of monetary conditions and China’s transition from economic ‘miracle’ to normal development – which could put downward pressure on equity returns.
“With lower volatility having already been priced in by the nearly 20% rise in global equity prices since the beginning of last year, equity returns over the next five years are expected to be lower – in the 3-4% range – than we had been anticipating previously and well below historic norms. Even so, returns on equities are likely to easily beat those on cash and bonds, both of which we expect to be negative in inflation-adjusted terms,” Larry Kantor, Head of Research at Barclays, said.
The study dedicates a chapter to China and contends that although China’s economy faces many risks, it is unlikely to collapse, and in fact can be expected to move toward “high income” status over the next decade. However, the report notes that it may continue to look different from Western advanced economies.
Finally, the Equity Gilt Study focuses on the risks associated with the extraordinary loose monetary policies of the major central banks since the onset of the financial crisis. It concludes that the authorities will have to act deftly to ensure these risks, which include high inflation, asset bubbles and reduced productivity, are contained.