In a world of low interest rates and historically high asset prices it can be difficult to decide what to invest in. Since predicting the future is impossible, perhaps looking at past returns can be helpful in trying to understand what might happen in the next few years. From the investment bank UBS they give some investment ideas analyzing in this way various classes of assets.
From UBS AM, they elaborate their forecasts on the capital market in a detailed way. They first analyze the size of the capital market. “In December 2020, we estimate that the current capitalization is 155 trillion dollars, of which 43% corresponds to stocks, about 43% to bonds, 7% to cash and 7% to alternative products.”
In this case, the alternative investments consist mainly of the real estate market, venture capital and a small part in infrastructure, wood and agriculture that together add up to 1%. However, it does not include gold, hedge funds, commodities, etc., which can add another 5% or 7% according to some estimates.
When calculating the risk and return expectations for the capital and alternative markets, these experts have some models that can help, but also they are based on the relationships that have been seen historically, as explained at the beginning.
In the last 25 years, this is the general pattern and some observations:
-Real estate: it has generated a return that is between stocks and bonds; valuation risk close to bonds, but economic risks should be higher
– Hedge funds: return and risk between stocks and bonds
– Venture capital funds: over the last 25 years, the average has outperformed the S&P by 420 basis points. In the last decade, it has been lower: 200 basis points. “We estimate that the average venture capital fund has a cycle of about seven years, which we have compared with the returns of 6 years of the S&P 500,” they explain from UBS.
Over the past 30 years, the medium private equity fund has earned a premium over the public or listed market (represented by the S&P 500). With a few exceptions, most of the time the profitability of venture capital funds is higher than that of public markets.
Asset types and expected return
To calculate future returns you have to know where you start from. Everything indicates that American stocks could be somewhat expensive, something that can also be extrapolated, although to a lesser extent, to world equities, as warned by the indicator that Warren Buffett uses to decide on his investments.
“Looking at our future profitability prospects, we see high valuations in the US equity market and neutral in non-US equity markets. We estimate global equity returns over the next 5 years to be around 5.1% in dollars without coverage, “says Álvaro Cabeza, Country Head of UBS AM Iberia.
On the other hand, this expert believes that “bonds, with the hedged currency, obtain returns in the low single digits. This figure is higher than a year ago, when our 5-year profitability forecast for debt world public was 0%. ”
The return on alternative assets will be higher on average
On the other hand, profitability estimates for alternative assets are affected by the low interest rate environment, but remain favorable relative to public markets. We will have to pay attention to what happens in the coming months and years with interest rates and monetary policy, since a reversal of central bank policies could generate an earthquake in the financial markets.
“Regarding private equity, we expect to see a premium similar to what we have seen historically, of 7.4%. We expect the profitability of the real estate market to be close to that of equities, with 4.5%, and that hedge funds and private credit are somewhat below 4%, “says the UBS expert.