Following a very challenging 2022 for global markets, investors understandably approached 2023 with a bearish bias.
Many customers who contact MOJO Finance with a view to building a savings or investment portfolio are understandably anxious about investing their present or future funds in global bond and equity markets and therefore want our opinion as to how markets will perform.
Of course, nobody can accurately predict how markets will perform over a one-to-two-year period and we try to make this as clear as possible to potential customers.
However, as Financial Advisors, it is our role to at least advise customers where likely we see markets headed over a longer period.
Considering this and as part of our investment process at MOJO Finance, we endeavour to provide customers with our views on long-term expected returns for each asset class that would typically be represented within a multi-asset portfolio.
Our long-term projected returns have moved up considerably from 6 months ago and in various asset classes, suggesting that mid-2023 presents an excellent entry point for investors with longer time horizons.
A summary of our long-term views for each asset class are as follows:
The 2022 stock market declines have made this year’s entry point better and supported higher predicted returns over the following 5–10 years. European shares look like good value overall, while emerging market shares are supported by growing populations and China’s reopening.
Bond yields rose dramatically because of the major central banks’ relentless rate rises, reaching their highest levels in 11 years for both government and investment grade corporate bonds. As bond prices move in the opposite direction to interest rates, bond valuations suffered as a result. With inflationary pressures easing and central banks moving closer to their peak hawkishness, higher yields and lower entry points for bond prices support higher projected returns over the course of five years and beyond.
MOJO Finance anticipates this asset class to gain from favourable structural developments in infrastructure, such as the widespread government support and a widespread shift toward cleaner energy which is likely to encourage even more investment in green infrastructure projects and even more demand for the underlying commodities that support them. Therefore, in our opinion, alternatives continue to provide investors with strong benefits of portfolio diversification.
In the short term, interest rate increases are likely to slow down the property sector, but our expected long-term returns remain favourable. Given its strong income component, property offers diversification and supports portfolio returns. Within the property sector, we believe there are likely to be opportunities for portfolios with more sustainable properties to perform well.
Over the next five to ten years, we anticipate the following key factors to have an impact on returns:
Due to price pressures remaining high we will for some time continue to see inflation above pre-COVID levels. However, there is a rapidly growing trend toward automation which will ultimately reduce input costs. We therefore anticipate that as a result, interest rates will be lowered, supporting long-term asset returns.
Long-term monetary policy
Monetary authorities will probably be more selective in how they employ instruments like quantitative easing and zero interest rates. This is expected to maintain interest rates and volatility greater than they were in the previous ten years, but it should also present more investment opportunities.
We expect growth will be increasingly influenced by technological progress and its implementation, the move towards net-zero and positive demographic changes. Importantly, we believe these drivers will likely be supported by fiscal policy as monetary policy becomes less supportive than in the recent past.
Reasons to optimistic about long term market returns
The last 16 or so months have certainly seen more bad news than good for markets. For much of last year, even good news about the economy was reflected poorly in global markets. 2022 was by far the worst year ever for bonds and the fifth worst year ever for U.S. equities (S&P 500). Although inflation remains high and central bank rate-rising campaigns prolonged, long-term investors have various reasons to be bullish about the market outlook.
Always expect short-term market fluctuations, especially for equity investors. However, historical data provides a much more accurate picture of the market’s resilience over the long term.
Markets have always experienced more gains than losses throughout time
For example, even though U.S. stocks show an average annual return of 10%, the S&P 500 has only ever once ended a year with an actual 10% return. More than one third of years end with a return higher than 20%, indicating a substantial favourable skew in the distribution of returns for calendar years.
Stocks and bonds, on average, conclude the year with positive returns around 75% and 89% of the time, respectively. This statistic lends optimism to long-term investors. Nevertheless, volatile years always lower the average, so investors should take this into consideration.
Markets can easily bounce back
Many investors make the critical mistake of trying to time the market. For a well-diversified portfolio remaining in the market is important and especially during a downturn. A loss only become a loss once assets are sold and the loss becomes crystallised. During volatile periods, markets can quickly and favourably respond to positive news. In fact, just two weeks separated the S&P 500’s worst and best days in 70% of the time. Missing the market’s best days can be very expensive!
Following a poor year for markets, shares and bonds have often performed positively in the following year. But what happens after one of the ten worst years, like 2022?
Following particularly bad years, average returns for both equities and fixed income have generally performed better in the following year. In those following years, bonds were only negative 33% of the time, whereas stocks were at 45%.
There are other factors supporting long-term investors’ optimism
Bonds and stocks rarely experience a decline at the same time. In fact, this is only the third time in history that both stocks and bonds have both lost value in the same year. The most effective measure available to investors for reducing investment risk is diversification, but as of 2022, nothing is certain to be successful. Given how uncommon it is for stocks and bonds to have a positive correlation, there is justification for a more upbeat market forecast in the long term, especially given that the performance the year after a poor year was generally favourable.
There will always be a crisis
To mention a few, there are geopolitical events, record highs and lows, recessions, bear markets, and interest rate increases. But regardless of the moment of entry, a diversified portfolio will produce favourable returns over time. ‘Time in the market’, not ‘timing the market’, is what investing is all about.
MOJO Finance approach to investments
MOJO Finance use the long-term expected returns to arrange and review appropriate investments for customers. Investors should anticipate stronger returns over the next five to ten years compared to a year ago. We believe this will benefit investors across the full risk spectrum and ranging from low, to moderate and to high-risk investors. Note that high risk investors are generally categorised as those invested in a well-diversified global share portfolio.
MOJO Finance are more invested in ensuring successful and sustainable outcomes for our customers, whatever their risk appetite, and looking at long-term returns is one aspect of this.
Please feel free to book an initial investment consultation with MOJO Finance