Continued Support For Asset Returns

Our capital market expectations (CME) are designed to provide annualized return expectations over a longer-term horizon, typically viewed as 10 years.

    Author name

    Chandra Seethamraju, Ph.D. Co-Head Systematic Strategies Portfolio Management, Franklin Templeton Investment Solutions

    Gene Podkaminer, CFA

    Gene Podkaminer, CFAHead of Research, Chair of Investment Strategy & Research Committee, Franklin Templeton Investment Solutions

    Every year we review the data that drive capital markets—current valuation measures, historical risk premia, economic growth and inflation prospects—to provide the foundation for our forecasts. We update the models that we use and review their continued appropriateness. Where necessary, we phase in required changes. Crucially, our models are based on first-principle economic relationships and reflect seasoned practitioner judgment.

    We continue to include as part of every capital market forecast a measure of the expected volatility of that asset class, informed by long-term observed standard deviation of returns. Given that global central banks’ quantitative easing policies may have repressed both equity and bond market volatility over recent years, our approach to modeling volatility avoids the recency bias of some alternative approaches and is particularly appropriate at a time when leading central banks have approached the limits of conventional interest rate policy.

    Our capital market expectations (CME) are designed to provide annualized return expectations over a longer-term horizon, typically viewed as 10 years. Specifically, we calculate geometric mean return expectations over a 10-year period, which both fully captures the average length of a US business cycle and aligns with the strategic planning horizon of many institutional investors. This length of horizon is especially relevant as we enter the early part of a new economic expansion following the coronavirus-induced recession.


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    Our modeling approach is based on a blend of objective inputs, quantitative analysis, and fundamental research, consistent with the skill set of our recently combined Franklin Templeton Investment Solutions (FTIS) business. Underpinning these inputs are assumptions on the sustained growth rates that developed and emerging economies can expect to achieve and the level of price inflation they will likely experience. This approach is forward-looking, rather than being based on historical average returns. This is especially important in an evolving macroeconomic environment.


    We believe global stocks have greater performance potential than global bonds, supported by sustained growth and moderate inflation. With short-term interest rates and government bond term premia remaining below historical averages, we see lower performance potential from government bonds, dragging down asset returns generally. Equity and corporate bond risk premia remain attractive and we continue to forecast stronger return potential for emerging markets over a 10-year investment horizon.

    Our strongest convictions:

    • Portfolio return potential moving lower
    • Asset risk premia near average levels
    • Portfolio diversification remains key


    Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Bond prices generally move in the opposite direction of interest rates. Thus, as the prices of bonds in an investment portfolio adjust to a rise in interest rates, the value of the portfolio may decline. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments. Investments in developing markets involve heightened risks related to the same factors, in addition to those associated with their relatively small size, lesser liquidity and lack of established legal, political, business, and social frameworks to support securities markets. Such investments could experience significant price volatility in any given year. Derivatives, including currency management strategies, involve costs and can create economic leverage in a portfolio, which may result in significant volatility and cause the portfolio to participate in losses (as well as enable gains) on an amount that exceeds the portfolio’s initial investment. Investing in the natural resources sector involves special risks, including increased susceptibility to adverse economic and regulatory developments affecting the sector—prices of such securities can be volatile, particularly over the short term. Some strategies, such as hedge fund and private equity strategies, are available only to pre-qualified investors, may be speculative and involve a high degree of risk. An investor could lose all or a substantial amount of his or her investment in such strategies. Real estate securities involve special risks, such as declines in the value of real estate and increased susceptibility to adverse economic or regulatory developments affecting the sector.