TD economists see long-term leveling-up for equities and fixed income
The bumpy ride for investors in equities and fixed-income investments currently and in recent years, but surely there are better things to come?
The long-term picture appears to be one of leveling up for traditional asset classes, following aggressive interest rates and the potential for recession which remain negative influences on markets.
TD Economics’ senior economist James Orlando, and economists Brett Saldarelli and Maria Solovieva expect that the coming decade should see higher bond returns as interest rates ease, while new product development and wider geographic reach should boost equities in publicly listed companies.
The typical balance between stocks and bonds has not been in play during this cycle as rates have weakened bonds while economic conditions have subdued equities. This has led to fixed-income assets suffering their worst sell-off in a generation, and investors favouring short-term money market assets which have outperformed to produce returns not seen for some time.
Improved portfolio returns
But changes are ahead with the TD team forecasting improved portfolio returns over the next decade.
“Central bank policy rates appear close to their peak and should come back down to ‘neutral levels’ over the coming years. This will be an impetus for lower government bond yields and higher fixed income gains. Although U.S. and Canadian equity markets will experience bouts of volatility in the future, we project long-term returns in the 5% to 8% range. All told, we have boosted our forecast for portfolio returns by 1% to 2% annually,” the economists wrote in their outlook.
For bonds, the BoC’s expected easing of rates from mid-2024 is good news.
“We are maintaining higher term premiums in the range of 0.5% and 0.75%. For investors that choose to lock in at current yields, we are expecting annual average returns in the range of 3.5% to 4.5%,” the economists state.
However, while bonds and equities are poised to rebound, for those investors currently enjoying returns on short-term cash securities, change will be required as “the current attractive rates on money market funds and other short-term assets are unlikely to last.”
