Emerging market equities are likely to generate the best returns over the coming decade, research by Schroders suggests, although investors could well be disappointed with the gains expected to be made across asset classes. 
The global asset management house’s latest 10-Year Return Forecasts report – which covers 2019 to 2029 – predicts that emerging market equities will make an annual return of 9 per cent in local currency terms over the period in question.
The forecast was carried out by Schroders chief economist and strategist Keith Wade and head of multi-asset strategic allocation modelling Riaz Fidahusein.
As the chart below shows, the past 10 years has seen the reverse situation play out with the developed market-focused MSCI World making a total return more than 125 percentage points higher than the MSCI Emerging Markets index.
Performance of indices over 10yrs
Source: FE Analytics
But Schroders’ forecast has global equities tipped to make an annualised return of just 5.7 per cent over the coming decade. The US is the developed market where the group sees the most upside, holding an annualised forecast of 6 per cent.
In a recent note explaining the firm’s current asset allocation views, Wade wrote that Schroders has a neutral view on global equities on the back of relatively full valuations, elevated cyclical risks and “unabated” trade tensions.
“Within equities, we have a preference for the US and emerging markets [EM]. US equities will benefit following noticeable recoveries in momentum signals for both price and earnings revisions and a more accommodative Fed,” he added.
“Valuations remain attractive for EM equities following the large sell-off in 2018, although trade wars remain a threat. EM markets with a more domestic focus present better opportunities. In addition, a more stable (or potentially weaker) dollar could be a catalyst for a stronger EM earnings story in coming months.”
When it comes to UK equities, an annual return of just 3.9 per cent is forecast although this is significantly higher than 3 per cent seen coming from the Japanese stock market. European equities are tipped for a 4.1 per cent annualised.
The chart below shows the forecasts for all the assets covered by Wade and Fidahusein’s research, along with the previous forecasts covering the 2018 to 2028 period.
Source: Schroders
As can be seen, emerging markets are expected to make higher returns that the developed world in the fixed income universe as well. The US is again the winner from the developed market bond sectors covered in the research.
In the alternatives space, private equity has the highest returns forecast by some margin – 7.2 per cent, against 3.9 per cent for hedge funds and just 0.9 per cent for commodities.
The above table also shows how the firm has cut its 10-year forecasts from the previous report. Emerging markets have been downgraded from 10 per cent while many other parts of the market also have seen their forecasts lowered by around one percentage point.
In addition, Schroders pointed out that investors may be disappointed with the expected returns for the next decade, if the asset management house’s recent Global Investor Study 2019 is anything to go by.
But the Global Investor Study 2019 surveyed more than 25,000 investors from 32 countries and it found that on average they expect their portfolio to return 10.7 per cent per annum over the next five years. One in six expect at least a “staggering” 20 per cent annual return on their total investment portfolio.
These expectations came despite 51 per cent of respondents who have some disappointment with their past returns.
Why have people not achieved what they wanted to with their investments over the past five years?
Source: Schroders
“This potentially unrealistic expectation is clearly a bone of contention for people, with over half of respondents believing they have not achieved what they wanted with their investments over the past five years,” Schroders said. “The performance of investment funds was the top reason that people felt they had failed to achieve what they wanted from their investments (11 per cent).
However, almost all the other high-ranking reasons related to people blaming their own actions, or inactions. These would be anything, from the length of time invested to the level of risk taken and whether advice was taken from an adviser or peer.”
The methodology behind Schroders’ 10-Year Return Forecasts report can be found here.