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Barclays Equity Gilt Study Sees Low-Risk, Low Return Environment for Investors

58th edition argues that equities remain the most promising option for investors seeking positive, inflation-adjusted returns

The ‘tail risks’ associated with the 2008-09 financial collapse have largely receded, resulting in a low-risk, low-return environment for investors who face far more challenging valuations and diminished prospective investment returns, according to the 58th edition of the Barclays Equity Gilt Study.

Furthermore, the investment environment will be driven by two transitions in the next five years – the eventual normalisation of monetary conditions and China’s transition from economic ‘miracle’ to normal development – which could put downward pressure on equity returns.

Larry Kantor, Head of Research at Barclays, said: “With lower volatility having already been priced in by the nearly 20% rise in global equity prices since the beginning of last year, equity returns over the next five years are expected to be lower – in the 3-4% range – than we had been anticipating previously and well below historic norms. Even so, returns on equities are likely to easily beat those on cash and bonds, both of which we expect to be negative in inflation-adjusted terms.”

The Equity Gilt Study also examines the structural demand for safe haven assets and concludes that it will remain high, thus keeping bond yields low relative to historic norms. Diminishing demand for safe havens associated with slower official reserve accumulation will likely be offset by demand from banks adjusting to new regulations as well as from private investors in countries with aging populations.

The study dedicates a chapter to China and contends that although China’s economy faces many risks, it is unlikely to collapse, and in fact can be expected to move toward ‘high income’ status over the next decade. However, the report notes that it may continue to look different from Western advanced economies.

Finally, the Equity Gilt Study focuses on the risks associated with the extraordinary loose monetary policies of the major central banks since the onset of the financial crisis. It concludes that the authorities will have to act deftly to ensure these risks, which include high inflation, asset bubbles and reduced productivity, are contained.

The Equity Gilt Study has been published annually since 1956, providing data, analysis and commentary on long-term asset returns in the UK and US. The UK data base goes back to 1899, while the US data – provided by the Centre for Research in Security Prices at the University of Chicago – begins in 1925. This publication is unique not only for its longevity, but also for its focus on medium- and long-term market trends.