Multi-asset  

Asset allocations over the next ten years

This article is part of
Guide to Multi-Asset investing

Asset allocations over the next ten years

Globally events are dominated by the US-China trade war, while closer to home, it is all about Brexit.

What does this mean for investors, and the assets they allocate to, over the next ten years?

Outlook for bonds

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The outlook for bonds over the next decade is poor, as around a third of all government bonds are returning negative yields. 

For example, holding a 10-year German Bunds to maturity will result in a negative return of -0.48 per cent, while investors who hold a 10-year US Treasury to maturity will get a return of 1.8 per cent. 

So as an investor planning for the long term, there are many factors to consider.

Andrew Wilson, chief investment officer at Lockhart Capital Management, says: “The bottom line is that it is going to be harder than ever for investors to preserve and grow the purchasing power of their savings and wealth, in real post inflation terms.  

“Cash and fixed interest investments are hence the most risky parts of a portfolio, in this scenario, and greater levels of asset price volatility will also become the norm.”

This means advisers will need to work much harder over the next decade for their clients.

Mr Wilson adds: “It is true that bonds and equities have usually traded with a far higher correlation than that which we have seen over the last twenty years, and some reversion to the previous regime is quite possible. 

"This has major implications for portfolio managers from the traditional 60/40-type through to risk parity approaches, which are likely to become far less efficient solutions.

"Portfolio managers in general have had life quite easy, at least to the extent that we have had wonderful bull markets in financial assets for the best part of 40 years, and the rising tide has lifted most, if not all, boats. 

"However, our suspicion is that managers will need to work much much harder over the next decade, as pro-active and adaptive asset allocation will become far more important.”

UK equities

Looking at the UK market, Darius McDermott, managing director at Chelsea Financial Services, says UK domestic stocks have a place in an investor’s long-term plans.

Mr McDermott says: “There is a discount on UK equities at a broad index level, because of what’s being called a Brexit premium. They are cheap and unloved because of Brexit. 

“There is a portion of the market - UK domestic stocks - which are even cheaper again.

"So, whether you think it will be a deal or no deal; on a ten-year view, one place you might be thinking in a contrarian way is allocating to the UK domestic market.”

Adrian Lowcock head of personal investing at Willis Owen believes that once there is certainty in the market around a deal or no deal, he expects confidence to return to the market, albeit at a more gradual pace.