Robeco’s Investment Solutions department found that the global economic cycle is enjoying a prolonged mature phase, but that expansion will slow as central banks continue their shift away from quantitative easing to tighter monetary policy.
Robeco’s report found that valuations for every major asset class was stretched and a transition to the next phase could send markets into a tailspin, making the likelihood of a recession inevitable.
The report, though, told investors to have patience as there was no need to panic given the growth and strength of the global economy.
On a five-year horizon, the US is likely to experience a recession and it may be triggered by the 2020 presidential elections as the US authorities may let the economy grow above its potential in the run up to them.
The head of Robeco’s investment solutions department Bart Oldenkamp said that over the next five years the global environment could change significantly.
“It is clear that the investment environment could change dramatically in the next five years and that current conditions are already quite challenging with compressed spreads, widespread overvaluation in the major asset classes and low volatility,” he said.
Mr Oldenkamp said that long-term investors would need to start to anticipate these changes and to be patient with the portfolios.
“Opting for a more defensive portfolio is often the default solution, but in the current economic climate there are risks associated with doing too much, too soon.”
“Therefore, investors should not forget that patience is a virtue in the world of investing too, as we believe that there are still opportunities to harvest risk premiums in the major asset classes,” he said.
The report expects equities to be the best-performing asset class over the next five years with emerging markets returning 4.5 per cent a year and developed markets 4 per cent for euro investors.
Government bonds will deliver negative returns with German bonds returning -1.25 per cent a year and global bonds returning -0.25 per cent.
Emerging market debt in local currencies should return 3.75 per cent a year, while investment grade corporate bonds should deliver 1 per cent.
