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Capital market assumptions - February 2023
February 28, 2023
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Raising our long-term capital market assumptions (CMAs)


After a tumultuous year that saw double-digit declines in most equity and fixed-income asset classes, our 20-year return assumptions are higher across the board. This is largely attributable to a positive impact from valuations, given that some of our growth expectations have actually declined from last year due to structural forces.


We have raised our long-run expectations for US equities to a 7.2% annualised return, relative to 5.8% at the end of 2021.


We are building in slightly higher inflation expectations in the US, but there is greater uncertainty in our baseline forecasts. Our assumption for U.S. inflation (CPI) has increased to 2.25%, though we still expect the US Federal Reserve to be successful in the long run, maintaining its target of 2%.


Non-US developed markets equity return expectations have also risen to 7.1%. Higher-dividend yield, greater multiple expansion, and assumptions of a tailwind from USD depreciation offset expectations of lower GDP growth. Meanwhile, emerging markets have the highest expected return at 9%.


Fixed income saw sharp losses across nearly all sectors in 2022 amid rapidly rising rates, significantly higher inflation, and a stronger dollar. We are likely to see some retracement of the rise in yields and a steeper yield curve.


Yields at the end of the third quarter of 2022 in some areas, including emerging markets debt and high-yield bonds, reflected a high risk of recession and are above levels that should be extrapolated over our 20-year horizon, so we could see some mean reversion.


In terms of currencies, we expect the US dollar to depreciate over a long-term horizon.


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