Uncertainty is a word used consistently to describe current global market conditions, with the US election, a potential slowdown in China and the Brexit vote making now one of the most unpredictable times in recent memory. 
This has been coupled with extremely loose monetary policy by most of the world’s central banks, leaving many worried of a debt crisis globally that could be worse than the one seen in 2008.
The loose policies have hit savers; with interest rates so low they are now being forced into more risky assets such as equities.
As a result, in the UK, for example, bond yields have fallen and are nearing negative rates while prices has rocketed as investors are more willing to pay for security.
Equities have also risen, particularly the ‘expensive defensives’ as low-risk investors unable to find yield in bonds have moved into some of the more stable lower-risk equities, as the below graph shows.
Performance of indices in 2016
Source: FE Analytics
Put all this together and you get a picture that is pretty unclear, with investors understandably unsure as to where to invest.
Enter Dutch asset management firm Robeco, which has given investors a forecast of the future, outlining three scenarios (in descending order of likelihood) that could take place over the next five years.
“As always, we present three scenarios, to cater both for the divergent ways our clients look at the world and to show the sensitivity of our return estimates,” the investment solutions team wrote in the report.
Scenario One (60 per cent likelihood)
“Faced with yet another disappointing year and the growing list of potential risks it is tempting to succumb to the general feeling of pessimism,” the report said.
“Tempting, but we continue to believe that a gradual normalization is the most likely outcome - call us optimists if you like.”
The report says that despite being in a low growth world, the rise of labour markets cannot be ignored, with unemployment rates in some of the world’s largest economies (including the US and UK) below their long-term averages.
This would lead to consumers feeling richer, with more disposable income in their pockets to buy products and begin the wheel of growth.
“In this scenario, consumers whose disposable income has been boosted by the drop in oil prices are expected to play a central role, as the balance sheets of the household sector have generally improved.”
Indeed, over the last three years the price of oil has plummeted, meaning many consumers will spend less on fuel, while many companies will feel the benefit of lower transportation costs etc.
Performance of index over 3yrs
Source: FE Analytics
The oil price has almost halved over the last three years, falling 46.11 per cent in sterling terms, while this is even more pronounced in the US where it has lost 56.35 per cent over the period.
This should lead to slow growth, the report says, with the world economy including the emerging markets expected to grow by 3 per cent annually with inflation reaching an average of 2.5 per cent.
However, this level of growth is still lower than the firm had anticipated a year ago, and the scenario has also become less likely, with Robeco downgrading it from a 70 per cent likelihood to 60 per cent.
In this scenario, the report says the future looks bleak for government bond returns, downgrading its five-year expected return on AAA European government bonds to -3.5 per cent.
“Yields have dropped to even lower levels than last year, which means that the buffer against adverse price moves has shrunk still further, and is in fact negative for AAA European government bonds,” it said.
This, however, is based on German 10 year bund yields - one of the lowest yields available currently – and the company says “value can be added if an active investment policy is applied for this asset class”.
Equities, meanwhile, are expected to rise around 6.5 per cent, a bump of 1 per cent on last year’s estimate, in part thanks to relatively low valuations worldwide.
However, the long-term outlook has been lowered. “On the one hand, this is a reflection of a somewhat reduced growth outlook – linked to lower productivity growth – but also to an update of expected dividend income,” the report said.
Alternative scenario A (30 per cent likelihood) and B (10 per cent likelihood)
“As for the alternative scenarios, we have become more cautious,” the report said.
“This is reflected in the upward revision of the likelihood of our stagnation scenario from 20 to 30 per cent.
In this scenario, average growth falls to 1.5 per cent, half the level expected in its most likely outlook, while inflation would average 1 per cent.
“Some areas will be hit by recession, China will hit zero growth, from which a subdued recovery will take place.”
As the below graph shows, concerns over a slowdown in China at the start of the year rocked markets, and any fall in growth from the country would cause a larger fall than the one seen on sentiment.
Performance of index in 2016
Source: FE Analytics
Also in this scenario, inflation will drop to an average of 1 per cent, but would reach deflationary average levels without the contribution of emerging markets.
“The Western world will sink into a Japan-like scenario, with aggregate price levels remaining unchanged for prolonged periods,” the report said.
“Unlike the baseline scenario, in this adverse growth scenario bonds remain the place to be, offering the only value for money.”
Alternative plan B – the least likely of the three - the US and the Eurozone economies expand rapidly, initially boosted by consumption, but eventually strengthened by investments as well.
In this scenario, the world economy would enter a “virtuous circle” with debt ratios coming down, the Chinese economy succeeding in transforming itself and, in the slipstream of the strong economies, growth in Japan accelerating as well.
On average, the global economy’s real growth will reach 3.5 per cent in this scenario.
“This may not sound like high growth if we compare it to the average 3.25 per cent seen over the past five years, but if we take aging and the lower (and more realistic) growth rate of the Chinese economy into account (average growth of 6 per cent compared to 8.5 per cent in 2010-2015), it means that growth will actually rise above its underlying potential,” Robeco said.
“The main risk in this scenario comes in the form of inflation. Bonds suffer and even stocks post somewhat less positive performances compared to our main scenario, as wage and financing costs hurt margins.”
“We have ended with our least likely scenario, but remember it’s always darkest just before dawn…”