Goodbody has reduced its forecast for annual returns from global equities over the next five years, following a very strong performance by stocks this year and an expected easing of the pace of profit growth from listed companies.
The stockbroking firm sees equities delivering an average 6.5 per cent return per annum over five years, including capital gains and dividends. That is down from the 8 per cent annual five-year rate it had predicted last year.
The MSCI All Country World Index, a gauge of global equities, is on track to have risen by almost 18 per cent in 2021.
"We retain a positive view for equities, but have lowered our expected returns after a strong 2021," said Joe Prendergast, global strategic adviser at Goodbody, a unit of AIB.
While Mr Prendergast said a spike in inflation as global economies emerge from Covid was “a concern for both cyclical and structural reasons” for financial markets, central bank were “likely to react slowly” in countering it by reining in stimulus programmes and hiking interest rates.
Earlier this month, the Bank of England became the first major central bank to raise rates, as it predicted that inflation was on track to hit 6 per cent in April, three times its target level.
The Goodbody strategist said bond returns were expected to be “muted” next year.
Goodbody sees global economic growth remaining above the normal trend in 2022, at 4.5 per cent, driven by ongoing consumer recovery.
“We’ve come from a period of a V-shaped rebound across most of the world. Global growth will be just under 6 per cent this year – and that’s exceptional in a historical context,” said Dermot O’Leary, chief economist at the firm.
European equities
Goodbody expects that European equates will deliver the highest regional returns over the next five years, of 7 per cent, as they are trading at lower relative valuations and currently offer higher dividend yields. However, it warned that European markets have higher earnings risk, given how dominant cyclical and financial companies are on stock exchanges relative to other major markets.
The US market has the best earnings outlook, but faces the largest valuation headwind, it said.
"We anticipate that emerging markets will be the weakest, with subpar returns expected as well as high governance and political risks," it said, highlighting that the outlook for China has also weakened.
The World Bank recently cut its forecasts for China's economic growth this year and next, as the world's second-largest economy faces mounting headwinds from the new Omicron coronavirus variant to a severe property sector downturn.
The bank now expects China’s gross domestic product to slow from 8 per cent this year to 5.1 per cent in 2022, which would mark the second slowest pace of growth for the country since 1990.
