Equities

Global equities 5-year expectations

Region

Region

Equilibrium Geometric Return (%)

Equilibrium Geometric Return (%)

5-Year Expected Return Local (%)

5-Year Expected Return Local (%)

10-Year Expected Return Local (%)

10-Year Expected Return Local (%)

Local Standard Deviation (%)

Local Standard Deviation (%)

5-year Expected Return in USD Unh (%)

5-year Expected Return in USD Unh (%)

10-year Expected Return in USD Unh (%)

10-year Expected Return in USD Unh (%)

Unhedged Standard Deviation (%)

Unhedged Standard Deviation (%)

Region

US Large Cap

Equilibrium Geometric Return (%)

7.4

5-Year Expected Return Local (%)

5.1

10-Year Expected Return Local (%)

5.5

Local Standard Deviation (%)

16.1

5-year Expected Return in USD Unh (%)

5.1

10-year Expected Return in USD Unh (%)

5.5

Unhedged Standard Deviation (%)

16.1

Region

Australia

Equilibrium Geometric Return (%)

6.5

5-Year Expected Return Local (%)

8.5

10-Year Expected Return Local (%)

8.7

Local Standard Deviation (%)

18.3

5-year Expected Return in USD Unh (%)

8.7

10-year Expected Return in USD Unh (%)

8.8

Unhedged Standard Deviation (%)

22.1

Region

Canada

Equilibrium Geometric Return (%)

6.6

5-Year Expected Return Local (%)

6.8

10-Year Expected Return Local (%)

6.9

Local Standard Deviation (%)

18.3

5-year Expected Return in USD Unh (%)

7.6

10-year Expected Return in USD Unh (%)

7.5

Unhedged Standard Deviation (%)

22.1

Region

Eurozone

Equilibrium Geometric Return (%)

7.0

5-Year Expected Return Local (%)

8.3

10-Year Expected Return Local (%)

8.6

Local Standard Deviation (%)

18.9

5-year Expected Return in USD Unh (%)

9.1

10-year Expected Return in USD Unh (%)

9.8

Unhedged Standard Deviation (%)

21.4

Region

Japan

Equilibrium Geometric Return (%)

6.9

5-Year Expected Return Local (%)

5.7

10-Year Expected Return Local (%)

5.6

Local Standard Deviation (%)

18.9

5-year Expected Return in USD Unh (%)

8.3

10-year Expected Return in USD Unh (%)

8.1

Unhedged Standard Deviation (%)

21.4

Region

Switzerland

Equilibrium Geometric Return (%)

5.8

5-Year Expected Return Local (%)

7.3

10-Year Expected Return Local (%)

7.6

Local Standard Deviation (%)

17.3

5-year Expected Return in USD Unh (%)

7.3

10-year Expected Return in USD Unh (%)

8.4

Unhedged Standard Deviation (%)

19.8

Region

United Kingdom

Equilibrium Geometric Return (%)

6.9

5-Year Expected Return Local (%)

8.6

10-Year Expected Return Local (%)

9.8

Local Standard Deviation (%)

18.3

5-year Expected Return in USD Unh (%)

9.5

10-year Expected Return in USD Unh (%)

10.5

Unhedged Standard Deviation (%)

20.9

Region

Developed Mkts

Equilibrium Geometric Return (%)

7.5

5-Year Expected Return Local (%)

6.1

10-Year Expected Return Local (%)

6.5

Local Standard Deviation (%)

14.9

5-year Expected Return in USD Unh (%)

6.6

10-year Expected Return in USD Unh (%)

7.0

Unhedged Standard Deviation (%)

15.4

Region

Developed x US

Equilibrium Geometric Return (%)

7.3

5-Year Expected Return Local (%)

7.5

10-Year Expected Return Local (%)

7.9

Local Standard Deviation (%)

15.1

5-year Expected Return in USD Unh (%)

8.7

10-year Expected Return in USD Unh (%)

9.1

Unhedged Standard Deviation (%)

16.7

Region

Emerging Mkts

Equilibrium Geometric Return (%)

8.3

5-Year Expected Return Local (%)

11.0

10-Year Expected Return Local (%)

11.6

Local Standard Deviation (%)

21.9

5-year Expected Return in USD Unh (%)

11.2

10-year Expected Return in USD Unh (%)

11.3

Unhedged Standard Deviation (%)

26.0

Region

Global Equities

Equilibrium Geometric Return (%)

7.7

5-Year Expected Return Local (%)

6.8

10-Year Expected Return Local (%)

7.2

Local Standard Deviation (%)

15.3

5-year Expected Return in USD Unh (%)

7.2

10-year Expected Return in USD Unh (%)

7.6

Unhedged Standard Deviation (%)

16.0

Region

Global x US

Equilibrium Geometric Return (%)

7.7

5-Year Expected Return Local (%)

8.5

10-Year Expected Return Local (%)

8.9

Local Standard Deviation (%)

16.1

5-year Expected Return in USD Unh (%)

9.3

10-year Expected Return in USD Unh (%)

9.7

Unhedged Standard Deviation (%)

17.8

For equities, we develop our Baseline, or five- and ten-year, equity assumptions based on several inputs: projected earnings growth, dividend yields, and a reversion to fair value as determined by our proprietary valuation models. We base these inputs on current economic conditions and market pricing, analysis of historical trends and relationships, and our judgment about future trends.

Our valuation models indicate that the US equity market is overvalued, while most of the rest of the markets are near fair value or undervalued. We project for the next five years US large-cap equity returns in the 5% range, global equities around 7.2%, developed ex-US around 8.7%, and emerging markets equities around 11.2% (note all returns are in USD terms).

It is helpful to break expected returns down into their building block components. For US equities, we expect valuation contraction of 1.3% per year, while in developed markets outside the US we project an expansion of multiples to add around 0.8% in local terms (boosted by a 1.1% appreciation for undervalued currencies).

Baseline five-year expected returns: Equity return decomposition (in %)

Sector

Sector

Equilibrium US Large Cap

Equilibrium US Large Cap

US Large Cap History *

US Large Cap History *

US Large Cap**

US Large Cap**

Dev Mkts x US**

Dev Mkts x US**

Emg Mkts**

Emg Mkts**

ACWI**

ACWI**

Sector

Inflation (Local)

Equilibrium US Large Cap

2.0

US Large Cap History *

2.9

US Large Cap**

2.0

Dev Mkts x US**

1.4

Emg Mkts**

3.0

ACWI**

1.9

Sector

Real Growth

Equilibrium US Large Cap

2.3

US Large Cap History *

2.2

US Large Cap**

2.2

Dev Mkts x US**

1.9

Emg Mkts**

3.9

ACWI**

2.3

Sector

Dividends

Equilibrium US Large Cap

2.9

US Large Cap History *

3.9

US Large Cap**

2.2

Dev Mkts x US**

3.2

Emg Mkts**

2.7

ACWI**

2.6

Sector

Valuation

Equilibrium US Large Cap

0.0

US Large Cap History *

0.7

US Large Cap**

-1.3

Dev Mkts x US**

0.8

Emg Mkts**

0.9

ACWI**

-0.3

Sector

Compound

Equilibrium US Large Cap

0.2

US Large Cap History *

0.3

US Large Cap**

0.0

Dev Mkts x US**

0.2

Emg Mkts**

0.4

ACWI**

0.1

Sector

Total Return Local

Equilibrium US Large Cap

7.4

US Large Cap History *

10.0

US Large Cap**

5.1

Dev Mkts x US**

7.5

Emg Mkts**

10.9

ACWI**

6.8

Sector

Currency Effects

Equilibrium US Large Cap

N/A

US Large Cap History *

N/A

US Large Cap**

N/A

Dev Mkts x US**

N/A

Emg Mkts**

N/A

ACWI**

N/A

Sector

Unhedged

Equilibrium US Large Cap

0

US Large Cap History *

0

US Large Cap**

0

Dev Mkts x US**

1.1

Emg Mkts**

0.2

ACWI**

0.4

Sector

Hedged

Equilibrium US Large Cap

0

US Large Cap History *

0

US Large Cap**

0

Dev Mkts x US**

1.9

Emg Mkts**

-1.9

ACWI**

0.4

Sector

Total Return Unhedged

Equilibrium US Large Cap

7.4

US Large Cap History *

10.0

US Large Cap**

5.1

Dev Mkts x US**

8.7

Emg Mkts**

11.2

ACWI**

7.2

Sector

Total Return Hedged

Equilibrium US Large Cap

7.4

US Large Cap History *

10.0

US Large Cap**

5.1

Dev Mkts x US**

9.4

Emg Mkts**

9.0

ACWI**

7.2

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