by Eric Frykberg
The warning comes from the Dutch-headquartered asset-management multinational, Robeco.
Each year, Robeco issues a forecast for the next five years. Its outlook for the years 2023 to 2027 portrays an economic machine with multiple moving parts, not all of them acting in unison.
The list of unco-ordinated activities is long: energy and food crises, high inflation in developed countries, uncertainty in China, supply chain problems, war, a pandemic, the lingering impact of printed money and hawkish central banks.
But Robeco is clear about one thing: returns on investments will diminish, due to a risk-free rate of return falling below its long term average. When combined with the impact of high inflation, investors will find getting a good return on equities hard work.
“Maintaining real purchasing power for a globally diversified portfolio will be daunting, as such a portfolio of stocks and bonds will have a real, inflation adjusted, return of -2.9% per annum,” the Robeco report said.
In another section, Robeco is forecasting a far more volatile business cycle. It suggests a farewell to the “Great Moderation”, a change 40 years ago from steep to gentle economic cycles. With the passing of the Great Moderation, sharp, up-and-down movements will be more common.
An extra problem was central banks' ineffective approach to inflation until very recently, Robeco wrote.
“Central banks have been whacking at the inflation ball and missing during the post pandemic recovery, ending up behind the curve,” the report said. This forced them to change tack and “embark upon a fast-paced tightening cycle this year.”
In its forecasts, Robeco said its base case was for a hard landing, where the global economy “undergoes a wobbly, drawn-out recovery after a US recession in 2023 cools demand enough to take the sting out of inflation.”
But there are two other scenarios. One foretells “The Silver Twenties,” in which US growth rises to 3.75%, predicated partly on environmental economic projects. But a bear scenario posits a “Stag Twenties,” in which tightening monetary policy triggers a recession which harms people's prospects but still fails to cure inflation.
Rebeco also forecasts a continued trend towards countries looking inward, with declining levels of direct foreign investment and attempts by countries to closer to self-sufficiency.
“Globalisation has become slowbalisation,” Robeco wrote.
Regarding climate change, the Rebeco report said the effect would be uneven on investment decisions. It said there would be little impact on developed country government bonds or on investment grade corporate bonds. But its effect on shares would be different, especially in emerging markets.
Generally, climate change would have a negative impact on investments, except in commodities, where energy transition and physical climate risks would put upward pressure on commodity prices.
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