We ended 2018 by narrowly escaping a technical bear market in the United States; this year, however, has already produced a double-digit return in most global equity indexes.¹ Central banks have provided much support for both the bond and stock markets—the People’s Bank of China engaged in sizable easing, and most developed-market central banks, including the U.S. Federal Reserve, adopted a dovish tone. That said, investors shouldn’t forget that we’re much closer to the end of the global growth cycle than the beginning, and recession risks will likely remain elevated over the next two to three years.
It’s through this framework that we formulate our return forecasts for the various asset classes over the next five years. Our forecasts are derived from a wide number of sources, including those from the team of macroeconomic strategists that’s embedded within the asset allocation team. While our long-term forecasts lean heavily on model-based valuation estimates, we firmly believe that macroeconomic views play an important role in identifying more short-term investment opportunities in actively managed portfolios.
Key macro views
Short-term macroeconomic themes
- Developed-market (DM) central banks, led by the U.S. Federal Reserve (Fed), are likely to have finished hiking interest rates in this cycle. In our view, the next change in interest rate is more likely to be a rate cut than a rate hike. This should keep bond yields relatively well contained globally.
- U.S. growth dynamics are likely to improve in the second and third quarters of 2019 following a difficult first quarter. We continue to view the U.S. consumer as a bright spot, not just within the U.S. economy, but globally. We believe the expected short-term improvement in U.S. growth, along with some mild reflationary pressures beginning in the summer, should provide support for U.S. equities and nudge U.S. yields slightly higher.
- China has engaged in substantial fiscal and monetary stimulus that will, in our view, arrest the deterioration in economic data witnessed throughout 2018. This has lifted investor sentiment toward emerging markets (EM), and should continue to offer a tailwind to Asia in general. However, we don’t believe that the Chinese economy will experience a V-shaped recovery unless the authorities engage in additional stimulus, particularly measures aimed at the property and credit markets.
- After a very difficult 2018, we believe European growth will find a bottom in the second half of this year, supported by more stable growth in China; Europe is also poised to benefit from improved global trade and industrial production activity in the latter part of this year.
- Geopolitical risks (Brexit, U.S.-China trade relations) will continue to weigh on sentiment.
Longer-term strategic views
Based on traditional leading economic indicators, 2020 looks set to be a more difficult year for the U.S. economy, with a small tail risk of recession. However, we expect any weakness to be short-lived and mild relative to past comparisons, with growth resuming toward trend in the latter part of our five-year forecast period. Strategically, this means we favor a modest growth bias in which we can contain risk and take selective opportunities.
We believe the U.S. dollar (USD) is likely to enter a structurally weaker period in the coming five years, largely on the back of growing trade and fiscal deficits. This could provide modest tailwinds to most non-U.S. assets, particularly EM assets, and support global growth through easier financial conditions and reduced financial tightening.
Despite expectations for a mild increase in price levels in the near term, we see little scope for elevated inflation over the coming five years. We expect DM inflation profiles to remain close to or below 2%. This should keep central banks relatively dovish compared with the past several decades, although we do see most policy rates rising in the latter part of our forecast period as central banks continue to pursue some degree of normalization.
We expect economic growth in China to continue to decelerate on a structural basis as the economy transitions away from manufacturing and toward services. That said, we believe EM debt and equities will remain attractive, thanks to valuation and carry.
NCREIF Farmland Index
The NCREIF Farmland Index is a quarterly index that measures the performance of a large pool of individual U.S. farmland properties acquired in the private market for investment purposes only. The composition of the index can change over time—for example, when assets are sold, and when new Data Contributing members are added. As such, the Farmland Index may not be representative of the agricultural investment market as a whole.
NCREIF Timberland Index
The NCREIF Timberland Index is a composite return measure of investment performance of a large pool of individual U.S. timber properties acquired in the private market for investment purposes only. It is updated quarterly and is reported on a national level. The index is reported on a national level and is subdivided into three regions: the Pacific Northwest, South and Northeast. The composition of the index can change over time, and as such, may not be representative of the imberland investment market as a whole.
NCREIF Open End Diversified Core Equity ODCE Index
This is a capitalization-weighted, gross of fee, time-weighted return index with an inception date of December 31, 1977. Open-end funds are generally defined as infinite-life vehicles consisting of multiple investors who have the ability to enter or exit the fund on a periodic basis, subject to contribution and/or redemption requests.
MSCI/REALPAC Canada Quarterly Property Fund Index
The MSCI/REALPAC Canada Quarterly Property Fund Index covers unlisted open-end Real Estate funds operating in Canada. The index measures the investment performance at the property and fund level. The index is based on funds with a total net asset value of CAD $32.1 billion as at December 2018.
Cambridge Associates LLC Infrastructure Index
The Cambridge Associates LLC Infrastructure Index is a horizon calculation based on data compiled from 93 infrastructure funds, including fully liquidated partnerships, formed between 1993 and 2015. Private indexes are pooled horizon internal rate of return (IRR) calculations, net of fees, expenses, and carried interest.
Investing involves risks, including the potential loss of principal. Financial markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. These risks are magnified for investments made in emerging markets. Currency risk is the risk that fluctuations in exchange rates may adversely affect the value of a portfolio’s investments.
The information provided does not take into account the suitability, investment objectives, financial situation, or particular needs of any specific person. You should consider the suitability of any type of investment for your circumstances and, if necessary, seek professional advice.
This material, intended for the exclusive use by the recipients who are allowable to receive this document under the applicable laws and regulations of the relevant jurisdictions, was produced by, and the opinions expressed are those of, Manulife Investment Management as of the date of this publication, and are subject to change based on market and other conditions. The information and/or analysis contained in this material have been compiled or arrived at from sources believed to be reliable, but Manulife Investment Management does not make any representation as to their accuracy, correctness, usefulness, or completeness and does not accept liability for any loss arising from the use of the information and/or analysis contained. The information in this material may contain projections or other forward-looking statements regarding future events, targets, management discipline, or other expectations, and is only as current as of the date indicated. The information in this document, including statements concerning financial market trends, are based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. Manulife Investment Management disclaims any responsibility to update such information.
Neither Manulife Investment Management or its affiliates, nor any of their directors, officers or employees shall assume any liability or responsibility for any direct or indirect loss or damage or any other consequence of any person acting or not acting in reliance on the information contained herein. All overviews and commentary are intended to be general in nature and for current interest. While helpful, these overviews are no substitute for professional tax, investment or legal advice. Clients should seek professional advice for their particular situation. Neither Manulife, Manulife Investment Management, nor any of their affiliates or representatives is providing tax, investment or legal advice. Past performance does not guarantee future results. This material was prepared solely for informational purposes, does not constitute a recommendation, professional advice, an offer or an invitation by or on behalf of Manulife Investment Management to any person to buy or sell any security or adopt any investment strategy, and is no indication of trading intent in any fund or account managed by Manulife Investment Management. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. Diversification or asset allocation does not guarantee a profit nor protect against loss in any market. Unless otherwise specified, all data is sourced from Manulife Investment Management.
Manulife Investment Management
Manulife Investment Management is the global wealth and asset management segment of Manulife Financial Corporation. We draw on more than 150 years of financial stewardship to partner with clients across our institutional, retail, and retirement businesses globally. Our specialist approach to money management includes the highly differentiated strategies of our fixed-income, specialized equity, multi-asset solutions, and private markets teams—along with access to specialized, unaffiliated asset managers from around the world through our multimanager model.
These materials have not been reviewed by, are not registered with any securities or other regulatory authority, and may, where appropriate, be distributed by the following Manulife entities in their respective jurisdictions. Additional information about Manulife Investment Management may be found at www.manulifeim.com/institutional.
Australia: Hancock Natural Resource Group Australasia Pty Limited, Manulife Investment Management (Hong Kong) Limited. Brazil: Hancock Asset Management Brasil Ltda. Canada: Manulife Investment Management Limited, Manulife Investment Management Distributors Inc., Manulife Investment Management (North America) Limited, Manulife Investment Management Private Markets (Canada) Corp. China: Manulife Overseas Investment Fund Management (Shanghai) Limited Company. European Economic Area and United Kingdom: Manulife Investment Management (Europe) Ltd. which is authorised and regulated by the Financial Conduct Authority, Manulife Investment Management (Ireland) Ltd. which is authorised and regulated by the Central Bank of Ireland Hong Kong: Manulife Investment Management (Hong Kong) Limited. Indonesia: PT Manulife Aset Manajemen Indonesia. Japan: Manulife Asset Management (Japan) Limited. Malaysia: Manulife Investment Management (M) Berhad (formerly known as Manulife Asset Management Services Berhad) 200801033087 (834424-U) Philippines: Manulife Asset Management and Trust Corporation. Singapore: Manulife Investment Management (Singapore) Pte. Ltd. (Company Registration No. 200709952G) Switzerland: Manulife IM (Switzerland) LLC. Taiwan: Manulife Investment Management (Taiwan) Co. Ltd. Thailand: Manulife Asset Management (Thailand) Company Limited. United States: John Hancock Investment Management LLC, Manulife Investment Management (US) LLC, Hancock Capital Investment Management, LLC and Hancock Natural Resource Group, Inc. Vietnam: Manulife Investment Fund Management (Vietnam) Company Limited.