The outlook for equities seems to be bright. Markets are at an all-time high, and this comes amid declining U.S. interest rates and a resilient economy that is operating at nearly full employment, says Richard Carlyle, an equity investment director at Capital Group. ‘It looks like this year we’re going to have 15 to 17 percent profits growth, leading to earnings growth, dividend growth, and share buybacks.’
Flavio Carpenzano, a fixed income investment director at Capital Group, says that the future for fixed income, particularly credit, seems quite rosy. ‘Fixed income investors are going to benefit with potential price appreciation as inflation goes down, which gives room for central banks to cut rates and revive the economy.’
Assessing the risk
The standard way to measure risk in equities is to look at volatility, but this is not an ideal measure, especially in the long term, Richard Carlyle says. In addition, for an individual nearing retirement, putting all one’s money in equities may not be prudent even if yields can be quite attractive.
As long as the US economy stays as strong as it is, I believe we will see progress in equities markets
Regarding fixed income, Flavio Carpenzano says that we face uncertainty about growth, inflation, and monetary policy, but credit spreads have been quite stable. ‘If part of your portfolio is invested in equities, you should buy treasury because they provide diversification.’
‘As long as the US economy stays as strong as it is, I believe we will see progress in equities markets. Equities have historically provided high returns, and where we stand today, and as long as you extend your time horizon long enough, I’m confident they will continue to do so.’ Richard Carlyle, Equity Investment Director at Capital Group
Consider the long term perspective
It may take three to four years for equity markets to recover following a slump, Richard Carlyle says, and market corrections of 20 to 25 percent can occur. Going back to the example of the individual about to retire, Richard Carlyle says, these factors need to be considered. However, if the investment horizon is longer, then equities are an attractive option.
We’re now in an environment where interest rates are high, and therefore yields are high. Fixed income is back
As for fixed income, Flavio Carpenzano says that one does need a long-term view, although perhaps not as long as in equities. Still, bonds offer a rather good predictability. ‘If you buy a bond with a maturity of five years, you know that at the end, you get your 100 dollars back along with a nice coupon every six months (except, of course, if the bond issuer defaults).’ Flavio Carpenzano agrees that post-financial crisis, the income function of bonds was not there, but he insists that 2022 was an exception. ‘We’re now in an environment where interest rates are high, and therefore yields are high. Fixed income is back !”
Looking to the future
In one of its regular publications, Capital Group look forward 20 years into the future and tries to calculate expected returns from different asset classes. In euros terms, for instance, the model suggests an expected return for equities of around 7.2 percent, which is better compared to global aggregate bonds in euros, Richard Carlyle says. ‘What we’re saying is that equities versus high-quality government bonds, in our prsoepctive numbers, will give you about four percent extra per annum in returns, and if you compound that over 20 years, that’s a significant value. But of course, those are only projections and cannot be taken as guarantee of future returns: we never know what the reality will be.’
Flavio Carpenzano says that if you have a five-year horizon, high-yield bonds can give a similar return as equity but with less volatility. ‘You can diversify equity exposure with bonds without sacrificing returns.’
‘Bonds are back : they provide again diversification from equities, and their current yield is high compared to the past’ Flavio Carpenzano, Fixed Income Investment Director at Capital Group
The takeaway
Both equities and fixed income offer interesting opportunities, especially in the current macroeconomic climate. As with all investments, they do come with risk, so it is worth remembering the rule of thumb: strive for a diversified, balanced portfolio.
To listen to Capital Group’s podcasts, click .