In the 2026 edition of our Long-term asset allocation study, we present our expectations for returns over five, 10- and 20-year investment horizons to facilitate the asset allocation of clients.
- Markets have remained resilient despite significant challenges, and we expect the economic environment will normalise over the coming years
- We see more value in fixed income than equities at current valuations, in particular government bonds and credit
- Investors could potentially take a two-step approach to asset allocation, based on economic fundamentals, to meet their specific goals
Despite significant global headwinds – from US tariffs to the Middle Eastern conflict – the economic outlook has continued to show resilience.
International forecasts for growth over the next five years remain largely unchanged, and we’re seeing an environment that supports risk assets over the medium term.
However, there are still risks including higher inflation because of the Iran war, as well as uncertainty over future central bank monetary policy.
In addition, elevated valuations imply only moderate risk-adjusted equity returns, with emerging markets, European equity and listed real estate potentially offering the most attractive prospects.
But our analysis reveals that credit and government bonds are now relatively more attractive sources of return compared with equity, offering euro-based investors potentially better risk-adjusted opportunities for the decade ahead.
Potential opportunities in fixed income and equities
We expect inflation to increase over the next few years because of the Iran conflict, but we believe the economic environment will normalise with inflation returning to central bank target levels in the US and UK, or lower in Japan and the eurozone. Monetary policy should then continue to ease over the coming years. This means we see potentially attractive opportunities in government bonds.
Inflation-linked bonds present an interesting case. While they can potentially provide protection against unexpected price rises, their risk-adjusted returns are marginally lower for than comparable nominal bonds. Euro, sterling, and dollar-denominated inflation-linked bonds, however, are currently offering higher returns due to elevated inflation and a real yield curve which is expected to decline.
In the investment-grade corporate credit universe, we see potential for attractive returns based on higher expectations for the underlying government bonds and have a regional preference for UK investment-grade bonds.
In emerging markets, we believe hard currency debt – bonds denominated in foreign currencies, predominantly in US dollars – looks marginally overvalued.
Within equities, most large-cap regional equity indices look relatively expensive while small caps look attractive.
Private assets may also offer the potential for investors to further diversify risk, though private markets have highly specific characteristics and cannot be compared directly with listed assets.
Generally, we believe investors should consider hedging currency risk to avoid it dominating fixed income volatility. Purchasing power parity theory suggests the US dollar, UK sterling and the Swiss franc are overvalued against the euro, while the Japanese yen appears undervalued.
Strategy and implementation
Investors could take a two-step approach to asset allocation decisions. First, they could generate an unconstrained long-short portfolio based on the difference between the long-term (equilibrium) and 10-year return expectations.
Second, they could use this to construct tailored portfolios fitting their targets and constraints, aiming to optimise portfolios with the best mix of assets to aim to maximise returns for their preferred level of risk.
This approach would separate equilibrium returns – what you’d expect over multiple economic cycles – from valuation adjustments specific to today’s environment. It could help show how current conditions influence expected returns and why certain assets look more attractive than others right now.
The result would be a strategy grounded in economic fundamentals and designed for investors’ specific goals.
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