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Long Run Returns Monitor (Oct.)

Our monthly Long Run Returns Monitor provides our updated long-term projected returns for major asset classes, as well as a summary of the macroeconomic forecasts which underpin them. All projections in this publication are as of 22nd October 2021. A more detailed explanation of our views can be found in our annual Long Run Economic Outlook and Long Run Asset Allocation Outlook.

22 October 2021

We think Brazil’s financial markets will remain under pressure

While Brazil’s financial markets have now fallen a long way, we don’t expect them to rebound any time soon.

22 October 2021

Investors overestimating interest rate hikes

The extent of the shift in investors’ expectations of interest rates over the past month has been staggering. Investors are now pricing in an 80% chance of a hike to Bank Rate, from 0.10% to 0.25%, at the Monetary Policy Committee (MPC) meeting on 4th And a further rise to 0.50% is now fully discounted in markets by the meeting on 3rd February. We agree with investors that an interest rate hike in the next few months looks increasingly likely. But, in our view, the extent of tightening that investors have priced in looks wide of the mark. Instead, we expect the Bank of England to hike rates gradually and by less than most expect. That’s based on our forecast that economic activity will be soft over the next few months, and that CPI inflation will peak just shy of 5% in April 2022 and fall back sharply thereafter.

22 October 2021
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China’s economic slowdown and US Treasury yields

Although slowing growth in China has probably weighed on US Treasury yields in the past, we don’t expect it to prevent them from rising over the next couple of years.

Assessing the outlook for DM monetary policy & bonds

Even though we think that most major developed markets (DM) central banks will hike their policy rates more slowly than investors currently anticipate over the next two years, we still expect the yields of 10-year government bonds to rise at least a little in most major DMs over that time. We anticipate that the increase will be the largest in the US, where we think inflationary pressures are strongest.

Near-term recovery to face stronger headwinds

The region has experienced a rapid recovery, but the re-opening boost has now faded and the region is likely to face stronger headwinds in the near term due to surging COVID-19 cases, rising inflation and supply disruptions. Central European economies are vulnerable to shortages of key production inputs in the auto sector and low vaccine coverage countries such as Russia, Romania and Ukraine look most at risk of imposing tighter containment measures. Inflation is likely to remain stubbornly high over the coming months and central banks are likely to continue their front-loaded tightening cycles well into next year.

Well placed to navigate choppy waters

As highly-open economies, Switzerland and the Nordics are far from immune to the issues of slowing global growth and supply-chain shortages that are currently vexing investors. Sweden is perhaps most exposed; the impressive rebound there looks to have peaked in July and momentum will fade in H2 2021.

We expect the rise in China’s bond yields to reverse

Rather than continue its recent rise, we think that the 10-year government bond yield in China will fall back over the next couple of years, even as US Treasury yields climb further.

18 October 2021
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