Insight

Asset allocations over the next 10 years

By Ima Jackson-Obot (Financial Advisor) – 19 September 2019

Globally events are dominated by the US-China trade war, while closer to home, it is all about Brexit.

What does this mean for investors, and the assets they allocate to, over the next ten years?

Outlook for bonds

The outlook for bonds over the next decade is poor, as around a third of all government bonds are returning negative yields. 

For example, holding a 10-year German Bunds to maturity will result in a negative return of -0.48 per cent, while investors who hold a 10-year US Treasury to maturity will get a return of 1.8 per cent. 

So as an investor planning for the long term, there are many factors to consider.

Andrew Wilson, chief investment officer at Lockhart Capital Management, says: “The bottom line is that it is going to be harder than ever for investors to preserve and grow the purchasing power of their savings and wealth, in real post inflation terms.  

“Cash and fixed interest investments are hence the most risky parts of a portfolio, in this scenario, and greater levels of asset price volatility will also become the norm.”

This means advisers will need to work much harder over the next decade for their clients.

Mr Wilson adds: “It is true that bonds and equities have usually traded with a far higher correlation than that which we have seen over the last twenty years, and some reversion to the previous regime is quite possible. 

Managers will need to work much much harder over the next decade, as pro-active and adaptive asset allocation will become far more important

Andrew Wilson

“This has major implications for portfolio managers from the traditional 60/40-type through to risk parity approaches, which are likely to become far less efficient solutions.

“Portfolio managers in general have had life quite easy, at least to the extent that we have had wonderful bull markets in financial assets for the best part of 40 years, and the rising tide has lifted most, if not all, boats. 

“However, our suspicion is that managers will need to work much much harder over the next decade, as pro-active and adaptive asset allocation will become far more important.”

UK equities

Looking at the UK market, Darius McDermott, managing director at Chelsea Financial Services, says UK domestic stocks have a place in an investor’s long-term plans.

Mr McDermott says: “There is a discount on UK equities at a broad index level, because of what’s being called a Brexit premium. They are cheap and unloved because of Brexit. 

“There is a portion of the market – UK domestic stocks – which are even cheaper again.

“So, whether you think it will be a deal or no deal; on a ten-year view, one place you might be thinking in a contrarian way is allocating to the UK domestic market.”

Adrian Lowcock head of personal investing at Willis Owen believes that once there is certainty in the market around a deal or no deal, he expects confidence to return to the market, albeit at a more gradual pace.

On a global level, emerging market equities might have the most upside, according to Paul Danis, head of multi-asset strategy, Brewin Dolphin.

Mr Danis says: “The global growth outlook is not great due to demographics, the low interest rate starting point and globalisation headwinds. 

“US equities also face the longer-term headwind in the form of structurally high profit margins, which may come under pressure on the back of a political shift to the left that results in policies implemented that favour workers over business; and elevated valuation multiples. Equities are still likely to outperform bonds.

Changing demographics

Changing demographics will also play a big role in investors’ long-term allocation strategy.

The west has an ageing population, while in emerging markets there is an exploding younger demographic.

Mr Lowcock says: “Demographics will play a very significant role in investing.

“That points to Asia and some emerging markets where they have still got a young growing population whereas the west has ageing populations, so you would expect an increasing exposure.

“But you would caveat that with what we have seen over the last decade.

“That demographic issue has still been true but Asia and the emerging markets have not led the world at the financial crisis.

“That has been America. Even though you have an ageing population there, you have a wealthy consumer. 

“Demographics will play an important role, but it is how you get exposure to those countries that lead.

“You look at what will the demand be from an ageing American population, but you also need to appreciate that India and Indonesia have large young working populations that are growing, same with countries like Nigeria and across Africa.

“You have to be careful about putting all your eggs in one basket.”

Mr Lowcock says another area to consider is ethical investing; looking at how younger generations will consume and expect companies to behave and how that will impact on investing as well.

Real assets, which includes precious metals, commodities, real estate, land, equipment, and natural resources have grown in popularity, as they have a relatively low correlation with stocks and bonds.

Mr Lowcock says the opportunities in real assets tap into the low interest rate environment, where people are looking for yields better than they get on cash or bonds, but they do not necessarily want the full risk of a full equity. 

Inflation

He adds: “Real assets are linked to inflation. Even with inflation at 1.7 per cent it is above the average rate on cash and above a lot of rates you get on bonds. 

“Even with inflation so low it does not matter because the alternatives are even lower.

“So Inflation-linked projects are going to be quite important and they offer that kind of security because they are government-backed and longer term. They offer the stability that an ageing population will look for in some respects.”

Mr Wilson adds: “Real assets, while lagging financial assets for the last few decades, are likely to perform much better, over the next ten years.  

“Some investment mandates are better set up for such a regime shift than others, and certainly a different mentality will be required for most portfolio managers and investors per se.”

Bonds may not work for investors in the long term, but Mr McDermott says although government bonds are not likely to be viewed as good long-term value investment, they might have a shorter term attraction, as they give safety in a portfolio.