Wealth Outlook 2024 - Slow then grow

37 Wealth Outlook 2024 | Portfolio views Core portfolios could be ready to shine was distorted. High-risk securities in zero rate environments attracted risk capital. Low-risk assets were overlooked by many investors as speculation ran rampant. We think of the inflationary spike and sharply restrictive monetary policies of 2022 and 2023 as the punishment applied to markets to correct those aberrations. They were also a reset that cleared out the speculators and restored asset prices to more temperate and ultimately more sustainable levels. We cannot be sure of the exact timing (so patience is key), but we’re confident (at least as confident as we can be) that a return to normal is coming. Our Strategic Return Estimates for 2024 According to Adaptive Valuation Strategies (AVS), our proprietary strategic asset allocation methodology, our Strategic Return Estimates for all the major asset classes are higher than they have been for several years ( FIGURE 2 ). The 10-year SRE for global equities stands at 8.7% ( FIGURE 2 ). Within that, we are estimating that developed market (DM) equities will average a return of 8.2%, rising from 7.0% in last year’s estimates. We are also forecasting growth in DM corporate earnings, which should help to keep valuations at reasonable levels and sustain those share price gains. On the flipside, emerging market (EM) equities experienced a setback in both prices and earnings in 2023, leading to a higher valuation. As a result, we forecast a slight decline in SRE from 12.9% to 12.8%. Investment grade fixed income 10-year forecast now shows an SRE of 5.4%, marginally higher than last year’s. Similarly, high yield fixed income also enjoys cheap valuation, which offsets tightening spreads, bumping the decade-ahead high yield SRE to 7.9%. Our forecast for EM fixed income has increased marginally to 8.1% as spreads have tightened. The shine returns to alternatives When it comes to the alternative asset classes, our research has shown that the Strategic Return Estimates for hedge funds and private equity highly correlate with small- and mid-cap public equities. This helps explain why, with small- and mid-cap (SMID) stocks historically cheap, the strategic return estimate for hedge funds has risen to 11.5% and private equity to 19.5% – the highest of all the asset classes. While private equity forecasts are attractive, it is important to balance this richer potential with the illiquid nature and high downside risk of the investments as well. Still, there are reasons to believe the asset class now presents potential opportunities for qualified investors. We cover this in more detail in Alternative investing in 2024 on page 41 and also provide more context on the regulatory backdrop contributing to this potential in the Opportunistic section that follows ( Investing with and in unregulated financial companies on page 71 ) . Although real estate valuations cheapened, the broader income profile is not improving, especially in the commercial segment. The SRE for real estate has, therefore, edged up only slightly to 10.9%, reflecting reduced rates over the next decade. Commodities ticked up slightly as well, to 2.7%, roughly in line with marginally higher expectations for inflation over the long-term.