“The strong returns we saw last year in 2020 – and in recent months as well – have been driven by transitional factors,” said Éric Morin, senior analyst at CIBC Asset Management, in a recent interview. .
Those factors include news of successful Covid-19 vaccines as well as ongoing budget support, both of which have resulted in “bigger yields that we shouldn’t expect this year,” said Morin.
In addition, “the valuation of stocks is no longer cheap,” which will also weigh on returns, he said.
While investors should expect more modest returns in the coming years, certain macroeconomic forces will remain a strong cyclical positive wind for equities.
For example, with the recovery only in the early stages in many regions, the economy is far from overheating, Morin said. In addition, “fiscal policy will remain conducive to growth, supported by actions of central banks and low core inflation,” he said.
In fact, Morin expects core inflation, which excludes volatile and idiosyncratic factors, to be low over the next decade.
While inflation is likely to rise in the near term, he said, that increase will be the result of transient factors, such as high demand and low inventories – a situation exemplified by the semiconductor shortage – and rising oil prices.
Its outlook for low core inflation is supported by various trends.
“The relative cost of capital to labor has continued to decline since 2015,” said Morin. “Thus, it is less and less expensive to invest in capital than [to] hire people. »Less hiring limits wages and consumer demand.
In addition, “it is increasingly possible to replace workers with machines, so the elasticity of substitution has increased over time,” he said.
In addition, the relationship between excess demand and inflation has also waned, Morin said, referring to a flattening of the Phillips curve in recent decades as central banks have actively targeted inflation.
Because the link between economic output and inflation is no longer strong, “in the event that the economy eventually overheats, we should expect less inflationary pressure,” said Morin.
Many developed economies also have an aging population, which is associated with lower inflation.
With core inflation therefore expected to remain low, “central banks will remain comfortable keeping interest rates low over the long term,” he said. “And that will support a fiscal policy that will remain growth-friendly and provide a positive wind for equity.”
His return expectations are that most share classes produce at least 5% on average over the next 10 years. By region, emerging Asia and emerging Europe will offer average equity returns of around 9%, he said, and Canada and Europe, around 6% to 7%.
His return expectations for US equities were more subdued, at less than 5%, due to high valuations.
Equity investors should expect more volatility and regional heterogeneity when it comes to returns, Morin said: “The global reopening will not follow a linear path.
The IMF recently revised up its GDP figures for countries like the United States and China, with the latter posting annualized growth of over 18% in the first quarter.
“But as impressive as these statistics are, many other countries are recovering at a much slower pace,” Kevin McCreadie, CEO and CIO of AGF Management Ltd., said in a recent blog post. “It’s important that investors don’t get too far ahead of themselves in thinking that growth rates of this magnitude are, in their own right, sustainable.”
Other factors that can weigh on returns are the potential for short-term inflation volatility and questioning of fiscal policy, Morin said.
Faced with a more difficult environment for returns, investors should not ignore a fundamental investment principle.
“It will be important for investors to have good diversification in the portfolio – [both] geographic diversification as well as sector diversification, ”said Morin.
This article is part of the AdvisorToGo program, powered by CIBC. It was written without the contribution of the sponsor.