Multi asset Multi asset Will the 60/40 portfolio rise from the ashes? 2022 has so far been one of the worst years on record for a US 60/40 portfolio. Here, the multi-asset team argue that while the longer-term outlook may be more positive, continuing uncertainty increases the appeal of diversifying exposures beyond traditional stocks and government bonds. Good news about bad markets This is the best outlook for returns since at least the fourth We acknowledge that the near-term macro outlook is quarter of 2018. For investors who embrace diversification Louis Finney Nicole Goldberger unusually uncertain. But regardless of what 2023 brings, we and augment portfolios with additional asset classes, the Research Analyst Head of Growth believe the inflation, growth, and geopolitical factors that prospective return profile is even better. This is particularly Investment Solutions Multi-Asset Portfolios have caused market strife in 2022 are increasing the potential pertinent in the current environment, where investors rewards for medium- and long-term investors willing to bear have to entertain the possibility that more inflationary these risks. This is the good news about bad markets. macroeconomic regimes endure for some time. We develop capital market expectations, which are projections Valuations improve for how different asset classes will perform over five years given The main driver of better expected returns across asset classes or much of the past 25 years, investors have benefitted Chart 1: 2022 has been one of the worst years on record our assumptions for growth, inflation, monetary policy, and other is the improvement in valuations relative to those embedded from a consistently negative correlation between equities for a US 60/40 portfolio key macro factors. These estimates indicate that now is a much in our capital market assumptions from mid-year 2021. More and bonds. Simply put, when equities sold off, investors % more attractive investing backdrop compared to 12-15 months favorable valuations, while retaining a similar outlook for Fcould generally rely on bonds to provide ballast and 35 ago. In our baseline scenario, expected five-year annual returns for real activity, naturally entail higher return expectations, all protection in a multi-asset portfolio. 30 a global 60/40 portfolio are now 7.1%, vs. 3.3% in July 2021, while else being equal. Our expected return on cash has increased 25 real (that is, inflation-adjusted) returns are 4.2% vs. 1.2% (Chart 2). substantially, from less than 1.0% to 3.8%, following 20 However, persistently elevated inflation and aggressive central 15 substantial interest rate hikes by central banks. bank tightening campaigns have put financial markets under 10 significant pressure this year. Investors have had virtually nowhere 5 Chart 2: History of five-year expected annual returns for a The extent of monetary tightening is linked to another change 0 global 60/40 portfolio to hide: the total return from global stocks is -21% through the -5 in our estimates: the average outlook for inflation over this first 10 months of the year. Global sovereign bonds and credit -10 % horizon, which has risen from near 2% to close to 3%. -15 8 have also performed poorly, with total returns of -22% and -21% -20 Importantly, while more robust price pressures help improve respectively, over this same period¹. -25 7 nominal expected returns, expected real (inflation-adjusted) -30 returns across asset classes have also improved materially. -35 ‘02 ‘12 ‘22 ‘32 ‘42 ‘52 ‘62 ‘72 ‘82 ‘92 ‘02 ‘12 ‘22 6 This has seen the typically negative stock-bond correlation turn positive. As of mid-November, the year-to-date return from a US 60/40 performance 2022 YTD US 60/40 performance 5 Currencies are another key consideration. The US dollar has portfolio with a 60% weighting to US stocks and 40% weighting Source: Goldman Sachs Investment Research Division, as of 16 November 2022. 4 become even more expensive over the past year, which in to US Treasuries is -15% (Chart 1). There have only been five Based on performance of S&P 500 and US 10-year Treasury note, rebalanced daily. 3 our projections increases the expected depreciation of the US calendar years on record in which the annual performance for 5-yr Geometric Return dollar over time as it reverts towards fair value. We believe this traditional portfolio structure has been worse – and besides 2 this is poised to boost returns for USD-based investors who the 2008 global financial crisis, all were more than 80 years ago. 1 hold international assets over a five-year horizon. Dec-18 Sep-19 Jun-20 Mar-21 Sep-21 Feb 2022 Jun-22 Oct-22 Nominal Real Source: UBS-AM, as of 31 October 2022. Note: the Y axis shows the annual 5-year geometric return (%) in USD terms. Nominal returns are in current dollars, while real ¹ Source: MSCI ACWI Index, Bloomberg Global Aggregate Treasuries Total Return Index, Bloomberg Global Agg Credit Total Return Index, to end October 2022 returns are inflation-adjusted. The reference indexes are MSCI All-Country World Index (unhedged USD) and Bloomberg Global Agg (hedged USD). 6 7