Opportunities on the Horizon: Investing Through a Slowing Economy

thematic updates | WEALTH OUTLOOK 2023 | MID-YEAR EDITION | 31 The movements of foreign capital have historically been a powerful force affecting local equity returns. The factors that drive foreign investors to acquire more net US assets are generally the same factors that drive local returns ( FIGURE 6 ) . This is especially true in emerging markets where confidence in local currencies is currently low and inflation is abating, which supports the higher relative returns for emerging markets in our updated Strategic Return Estimates– ( FIGURE 7 and 8 ). A strong growth environment and low inflation are typically positive for equities even if it hurts the competitiveness of exporters. Understanding the strategic return estimates ( SRE ) 1 The 2022 market decline – the largest combined falls in equities and fixed income since 1931 – may be a reason for higher future returns across markets. This potentially is true for non-US markets starting at a lower initial valuation. A second reason why USD returns can exceed prior periods is the dollar’s likely decline. Our asset class Strategic Return Estimates (SRE’s) for emerging equities and fixed income suggest a 12.9% and 7.8% respective potential return opportunity per annum over the coming decade. FIGURE 6 : US Dollar Impact in Recent History Decade ending in December Annualized Real Total Returns S&P 500 (%) Change in Real Broad Trade Weighted Dollar Index (%) 1970s 0.4 -13.9% 1980s 13.8 3.4% 1990s 28.4 8.3% 2000s -0.9 -12.1% 2010s 11.9 17.7% Source: Bloomberg as of April 25, 2023. Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance. Past performance is no guarantee of future results. Real results may vary. FIGURE 7 : Emerging Markets Equities at Discount to US Equities -80 -60 -40 -20 0 20 40 60 80 100% '92 '97 '02 '07 '12 '17 '22 Emerging Markets Premium/Discount to US CAPE Source: Factset as of April 21, 2023. Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance. Past performance is no guarantee of future results. Real results may vary.