No place to hide

Five-year capital market assumptions

Asset allocation 06 Aug 2021

This update focuses on our 5-year baseline expected geometric returns and examines four potential inflation and growth scenarios.

UBS AM’s Views

  • Global equities continue to be expensive on an absolute basis. On a relative basis, they still offer value over cash and inflation, assuming inflation to be around targets set by central banks. Some individual markets (Japan, Europe) are undervalued and offer some of the best expected returns over the next five years.
  • Expected government bond returns in developed markets are higher now than six months ago.
  • The US dollar’s retreat leaves the currency closer to fair value. Going forward, we see limited gains from currency exposure for unhedged non-USD assets in USD terms.
  • We explore how inflation risks should influence positioning. Conservative investors that need to protect real purchasing power in the short run (a retiree on a tight budget) will likely invest differently than investors that have long time horizons.
    • Longer term investors should overweight equities, real estate and a lower bond duration profile.
    • Shorter term investors should tilt toward short duration inflation-linked bonds, short-term corporates and floating rate notes. Equities offer little inflation protection in the short run, but probably do well relative to other asset classes. Real estate and commodities should help manage inflation risk in the short run.