It its latest report on expected returns for the next five years from 2017 to 2021, asset manager Robeco notes the number of negative surprises seen by markets in 2015 and 2016.
“The US economy has been hit by falling oil prices, Europe is still reeling from the UK Brexit result and Chinese growth prospects look uncertain,” Robeco says.
“The Federal Reserve has carried out a solitary rate hike, but the central banks in the UK and Japan still seem to be light years away from this. The monetary normalisation we expected has not materialised.”
As a result, sentiment among professional investors has hit “rock bottom”.
Can sentiment recover?
Robeco, which has $400bn funds under management worldwide, forecasts that equities will have an average return of around 7% over the next five years with bonds experiencing negative returns.
However, once expectations become this poor, markets can turn, Robeco says, although the bad news might continue to dominate for months.
“The bleaker the expectations, the better the odds that the surprise will be a positive one,” Robeco says in its forecast. “We continue to believe that a gradual normalisation is the most likely outcome.”
The group says that despite low growth, labour markets have strengthened, with unemployment rates in all the leading economies below their long-term averages.
Consumers the key
“Consumers whose disposable income has been boosted by the drop in oil prices are expected to play a central role.”
Chief investment officer Lukas Daalder said in Sydney on Tuesday that consumer spending was significantly behind other cycles and the consumer would become the engine behind the world economy.
In Robeco’s baseline scenario for the five-year outlook, it forecasts that the world economy, including emerging markets, could grow by “roughly 3%, inflation will reach an average 2.5% for the world as a whole and 2% for the developed countries”.
It gives the baseline scenario a likelihood of 60%, with ongoing stagnation - a lengthy period of little or no economic growth - pegged at a 30% chance and high growth at 10%.
Robeco’s parent company has its headquarters in the Netherlands.