Expected returns in 2017: Only slightly higher – Goldman Sachs

Research Team at Goldman Sachs suggests that the expected total return forecasts across a broad array of assets are actually slightly higher for 2017 than they were for 2016.

Key Quotes

“Comparing this year’s forecasts to last year’s reveals that, despite a slighter stronger outlook for global growth, expected returns remain low. In US equities, for example, we have upgraded our expected return forecast, but only to a modest 2.7% for 2017 (vs last year’s forecast of 1.5% for 2016). The best improvement in the opportunity in global equities is in Asia ex-Japan, where we forecast returns of 12.5% (vs 3.8% for 2016). At the other end of the equity spectrum, in Japan we are forecasting declines of -3.7% on the Topix (vs 5.2% for 2016).” 

“In bond markets, the opportunity set for returns looks just about as bad for 2017 as it looked for 2016. For US 10-year Treasuries, for example, our 2017 total return expectation is around negative 50bp (we forecast yields to end 2017 at 2.75%). With an expected return of around -11%, German Bunds will remain among the most challenging bond markets for USD-based investors, mainly because of the roughly 10% depreciation of the Euro against the USD that we forecast.”

“Finally, expected credit returns do not look as attractive to us as they looked in 2016 but, given that spreads have not rallied much past their historical medians this year, they still look much better than pure rates duration and offer the best carry in the global fixed income landscape. A very similar picture holds in Emerging Markets, where valuations are perhaps less compelling than in early 2016, but the real carry on offer is still generous relative to DM fixed income. The highest credit return available remains in US HY, where we expect returns of 4.3% in 2017 (vs our expectation of 8.2% in 2016). The biggest difference between this year forecast and last year’s is valuation — US HY has been among the best performing asset classes in 2016, with the BAML HY index returning over 14% year to date. US IG, however, looks slightly better next year (3.1% vs 0.3% last year), mostly due to the lower drag from rates.”