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Strategic Asset Allocation View (7-years)

The seven-year forecast predicts mid-to-high single digit equity returns, mid-single digit returns for US government debt and investment grade bonds, and higher returns for new private market strategies. The forecast also anticipates riskier credit assets to be volatile in the next 12 months, but attractive over a mid-term timeframe.

We consider the following factors when developing our 7-year forecasts.

The era of ultra-low interest rates is likely over with interest rates remaining elevated for longer.

Labor shortages persist in service-oriented industries and may constrain margin expansion.  

Energy prices are likely to be higher vs. the prior cycle given structural supply shortages.

Geopolitical uncertainty is increasing with regards to the US-China relationship and potential for episodic military conflicts.

With equity valuations having declined significantly in 2022, we now expect mid-to-high single digit nominal pre-tax annual equity returns (6.5%-7.5%) over a seven-year forecast period.

We continue to expect greater convergence between US and International equity market returns. While we expect quality and growth stocks to outperform value stocks over the forecast period, the rate of outperformance is likely to be lower than in recent years. We still anticipate significant volatility over the next 6-12 months as interest rates are yet to peak and many economic indicators appear to be slowing rapidly.   However, inflation clearly seems to be in retreat and China’s reopening should lend support to global growth.

The effects of the recent US bank failures and potential wider spillover to US regional banks remain to be seen.   A swift pullback in bank lending would result in credit contraction and likely lead to a faster and potentially more severe recession (although this is not our base case).    

“Safe” fixed income remains attractive, especially for shorter-term maturities

US and Canadian 1-year Treasury bond yields are still yielding 4.4% to 4.6% while shorter-term (6 month) yields are even higher at 4.6% to 4.9%.   However, mid-term (7-to10-year maturities) bond yields have dropped swiftly over the past month and now only yield 2.8% to 3.4%.     

We still expect mid-single digit returns for US government debt and investment grade bonds over the forecast period.

On a risk-adjusted pre-tax basis, safe fixed income is still quite attractive relative to equities.

Riskier credit assets (high-yield bonds and leveraged loans) are also attractive over a mid-term time frame (and on a relative basis to equities)

US high-yield bonds are now yielding 8.2% with 7-year forecasted annual returns of 7.0% (inline with US equities).   Leveraged loans are currently yielding 10.1% (based on 3-year takeout convention) with expected mid-term annualized returns in the 7.0% range.

However, on a nearer-term basis (next 12 months), high yield bonds and leveraged loans may experience declines and heightened volatility if credit spreads widen further were a deeper than expected recession to occur.  

For new private market strategies (i.e., private equity, private credit, real asset funds), we continue to forecast higher returns relative to public markets (over a multi-year timeframe). 

Continue Reading Topics from This Quarter's Review

Inflation and Labor Markets

Inflation data in the US has been mixed in 2023, with headline CPI declining on a YoY basis but core CPI remaining high. While leading indicators suggest decelerating inflation rates,

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Macroeconomic Conditions

US economic growth is expected to decelerate, with the risk of a mild recession in H2 2023 or early 2024. A severe credit crunch could occur if lending is significantly

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Shorter-term View

The trajectory of equity markets will be determined by interest rates, economic growth, outlook for corporate earnings, and potential for large sustained financial system disruptions. There are three potential scenarios

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Equity Markets

Equity markets have appreciated YTD across all major regions, with growth stocks outperforming value stocks. Valuations are generally fairly valued to modestly overvalued relative to historical averages, but confidence in

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Fixed Income Markets

We discuss the performance and valuation of safe fixed income investments. Yields have pulled back since March due to concerns about US regional banks, and while signs of stress are

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Alternatives & Private Investments

The HFRX Hedge Fund Index was flat in Q1 2023, with convertible arbitrage and credit strategies performing best while global macro/trend following strategies performed worst. Private real estate showed mixed

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Actionable Investment Opportunities

We highlight actionable investment opportunities across various asset classes, including short-term US and Canadian government debt, high-yield bonds, private credit strategies, preferred and structured equity, venture debt, and new allocations

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BCA is not for everyone – and we are proud of that distinction. We look for a select group of individuals (and their entities) whose financial position and preferences enable them to thrive while working with us.

We welcome your interest. Please give us at call at +1-406-556-8202 or fill in the form below to set up a confidential exploratory consultation.

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