Capital Market Assumptions - October 2023

Ninety One’s Capital Market Assumptions framework focuses on the key drivers of long-term performance. We do this to better understand possible future returns, enriching discussions with our clients.

1 Nov 2023

20 minutes

Ninety One’s Capital Market Assumptions framework focuses on the key drivers of long-term performance. We do this to better understand possible future returns, enriching discussions with our clients.

Our framework emphasises income payments across asset classes, as they are both readily measured and pivotal in determining returns.

We divide returns into three components. The first – income – is a tangible, known entity, but the other two are subject to misestimation:

1 Income
Yield is historically the single most important explanatory factor for income-generating assets
2 Growth
The extent to which income is expected to change over time
3 Revaluation
The price per unit of income likely to apply at the end of the period (typically, 10 years)

Capital Market Assumptions - October 2023

01
Key takeaways
02
Historical effectiveness
03
Fixed income
04
Case study: Looking at return drivers of growth
05
Equities
06
Case study: The case for international diversification
07
Currency
08
Methodology
09
Frequently asked questions
10
Ask a question
01

Key takeaways

Sandstone pillars, National Forest Park, China
Higher interest rates have lifted prospective returns for risk free assets but risk premia remain very compressed.

A clear divergence has emerged between fixed income assets, where prospective returns have moved towards historic average outcomes, and equities, where expected returns remain low relative to long run historic outcomes and well below the prospective returns that have been on offer at the bottom of major historic bear markets.

Our current Capital Market Assumptions (30 September 2023) remain somewhat bearish in aggregate: we anticipate that a traditional 60% global equity, 40% global government bond portfolio will deliver a 4.9% annualised return for the next decade in nominal terms, when hedged into US dollars. This is higher (0.7%) than our last update six months ago but remains markedly down from our forecasts in March 2020 in the immediate aftermath of the COVID sell-off. An increased allocation to higher risk fixed income assets would increase portfolio return expectations, at the cost of higher correlations to equities.

We continue to see a need for considerable value-add from asset allocation and security selection decisions as well as from identifying investments that will benefit from structural growth tailwinds to achieve investment objectives.


Source: Ninety One proprietary Capital Market Assumptions as at 30 September 2023.
These estimates are gross of fees (returns can be reduced by management fees and other expenses incurred) and reflect the view of Ninety One’s multi-asset team, whilst the views of other teams across Ninety One may differ. Details on our Capital Market Assumptions methodology available upon request.

General risks. Forecasts are inherently limited and modelling involves risks, assumptions and uncertainties, they are forward looking and are not guarantees nor a reliable indicator of future results. Actual returns could be materially higher or lower than projected. This information is not intended as a recommendation to invest in any particular asset class or strategy or as a promise of future performance. The value of investments, and any income generated from them, can fall as well as rise. Costs and charges will reduce the current and future value of investments. Where charges are taken from capital, this may constrain future growth. Past performance is not a reliable indicator of future results. If any currency differs from the investor's home currency, returns may increase or decrease as a result of currency fluctuations. Investment objectives and performance targets are subject to change and may not necessarily be achieved, losses may be made. Environmental, social or governance related risk events or factors, if they occur, could cause a negative impact on the value of investments.

Important information
Source: Ninety One proprietary capital market assumptions as at 30 September 2023.

These estimates are gross of fees (returns can be reduced by management fees and other expenses incurred) and reflect the view of Ninety One’s multi-asset team, whilst the views of other teams across Ninety One may differ. Details on our Capital Market Assumptions methodology available upon request.

Our expected returns estimates are for illustrative purposes only, are not a guarantee of performance and are subject to change. They are provided merely as a framework to assist in the implementation of an investor’s own analysis and an investor’s own view on the topic discussed herein. They should not be relied upon as recommendations to buy or sell securities. Forecasts of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. The outputs of the assumptions are provided for illustration/discussion purposes only and are subject to significant limitations. Expected return estimates are subject to uncertainty and error. Expected returns for each asset class are conditional on an economic scenario; actual returns in the event the scenario comes to pass could be higher or lower, as they have been in the past, so an investor should not expect to achieve returns similar to the outputs shown herein. Because of the inherent limitations of all models, potential investors should not rely exclusively on the model when making a decision. Unlike actual portfolio outcomes, the model outcomes do not reflect actual trading, liquidity constraints, fees, expenses, taxes and other factors that could impact the future returns. Note that these asset class assumptions are passive, and do not consider the impact of active management. All estimates in this document are in US dollar terms unless noted otherwise. The final total returns are converted from logarithmic to geometric estimates. This means that the components of the return breakdown may not sum to the total return. While useful for modelling and calculation purposes, the logarithmic return is theoretical (assumes continuously compounding returns) whereas the geometric estimate reflects practical experience (reflects discrete periods of compounded returns).

Indices
Indices are shown for illustrative purposes only, are unmanaged and do not take into account market conditions or the costs associated with investing. Further, the manager’s strategy may deploy investment techniques and instruments not used to generate Index performance. For this reason, the performance of the manager and the Indices are not directly comparable.

If applicable MSCI data is sourced from MSCI Inc. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, endorsed, reviewed or produced by MSCI. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.

If applicable FTSE data is sourced from FTSE International Limited (‘FTSE’) © FTSE 2023. Please note a disclaimer applies to FTSE data and can be found here.

Global equities = MSCI All Countries World; Developed equities = MSCI World; US equities = MSCI USA; Continental Europe equities = MSCI Europe ex UK; Japan equities = MSCI Japan; UK equities = MSCI UK; Emerging equities = MSCI EM; China equities = MSCI China; Global sovereign bonds = Country-weighted composites, based on the JP Morgan Global Bond Index, of our regional estimates*; US, Europe, Japan, UK, China sovereign bonds = Notional 10-year bond; Emerging (Local Currency) bonds = Country-weighted composites, based on the JP Morgan GBI-EM Global Diversified, of our regional estimates*; US Investment Grade = Notional 10-year bond, using Bloomberg US IG Yield Curve; US High Yield = Notional 5-year bond, using ICE BAML US High Yield index for OAS; Sovereign Emerging (Hard Currency) = Notional 10-year bond using JP Morgan EMBI Global Diversified Index spread; Emerging Investment Grade = Notional 5-year bond using JP Morgan CEMBI Global Diversified Index spread.

*Not all of which are shown here.