Money managers are expecting a dose of reality this year as they wave goodbye to double-digit large-cap equity returns, according to a KPMG Investment Consulting Group survey.
Among the 60 investment firms responding to KPMG's "Survey of Economic and Capital Market Expectations," the consensus predicted the U.S. equity market would average gains of only 7.6% per year, a far cry from the 24.1% average over the past five years.
As markets recover from their 1998 dips, "we again see this incredulity at the height of the market," said Luke M. Collins, director, investment management consulting at KPMG in Chicago.
For 1999, respondents expect large-cap equities to have a real return of 3.5%, vs. 1998's real return of 27%.
Economically, money managers forecasted inflation of 1.9% for 1999, increasing to 2.2% over the next five years and 2.4% over the next 10 years.
This year, the S&P 500 returned 5% in the first quarter; inflation was 0.7% in that time period.
Mr. Collins said the predictions were not surprising, since many managers have been calling for a return to the long-term average.
The long-term historical average return of stocks compounded annually for the past 73 years is 11.2%, according to Ibbotson Associates, Chicago.
This year large-cap value stocks should outperform large-cap growth equities -- 6.7% vs. 6.4%, the managers surveyed said. Value and growth returns will continue to be close over the next 10 years, posting annualized returns of 8.8% and 8.7%, respectively.
The managers surveyed predict small-cap equity and emerging markets are good bets, but if interest rates were to be hiked, the situation could be much different.
While small-cap stocks should outperform large-cap stocks in the next five to 10 years, this year small-cap will yield a -1% real return, the survey showed. The average annualized small-cap return is expected to stand at 11.2% for the next 10 years, according to the firms surveyed.
Small-cap stocks will likely rebound, but will continue to show higher volatility than that of large-cap stocks. Overall, the standard deviation for stocks is expected to be higher in U.S. markets in the next five years, while better performing international markets should be less volatile for the same time period, money managers concluded.
Emerging markets optimism
Ever-volatile emerging markets stocks also are expected to outperform U.S. stocks and traditional international equities in the future, while returning 13.9% in 1999 and averaging 12.9% annually over the next five years, according to the study. This is still a lower return than the 24.8% average between 1994 and 1998.
The same is true on the bond side, where emerging market debt is expected to return 10.9% in 1999 and 9.5% annualized over 10 years, higher returns than those of all types of international bonds.
International equities are expected to outshine global equities, managers told the consulting firm. Global stocks should return 9.6% annualized over 10 years, while international stocks will post 10.7%, managers said.
International bonds also will outperform global bonds, returning 6.3% and 6.0%, respectively, annualized over the next 10 years. Global bonds, however, are expected to have returns far above those of European and Japanese bonds, which managers believe should yield an average annualized 5.2% and 1.6%, respectively, over the next 10 years.
U.S. bonds probably won't be as lucrative as global bonds, with intermediate maturity bonds returning an annualized 5.8% over next 10 years and 5.7% in 1999. High-yield bonds should continue to be the best performing of all U.S. bonds, with a 1999 return of 8.5% and a 10-year annualized return of 9%.
Managers predict the Treasury yield curve will continue with a positive slope in 1999, and will steepen within the next 5 years. Short-term yields will remain constant, while long-term yields will increase over the same time frame. The corporate yield curve should also slightly curve upward in the next five years, since short-term interest rates will be less than long-term rates on AA-rated corporate bonds.