Many investors may not have felt they were in a golden era, but nevertheless, the report said they would now have to lower their expectations as the forces that have driven exceptional returns weaken.
The problem is, investor expectations are already too high. Survey after survey shows that investors have elevated growth expectations for their money, leaving them saving too little in the accumulation phase, and disappointed with their income in the decumulation phase. A recent global investor survey from Natixis shows that investors have near-double digit return expectations. At the same time, the vast majority also say they want safety over investment performance. This inability to rationalise return expectations with risk tolerance is a persistent theme.
To some extent, investors have not had to adjust their expectations to date, despite all the talk of a ‘low return world’. The average UK All Companies sector fund is up 39.4% over the past five years. The average sterling corporate bond fund is up 30.1%. Those who have invested have done well; it is cash savings where returns have been low and savers who have had to adjust.
The problem is that we may now be heading into a low return world for real. The McKinsey report said: “The big decline in interest rates and inflation is reaching its limits, global GDP growth will be lower as populations in the developed world and China age, and the outlook for corporate profits is cloudier.”
It points out that while digitization and disruptive technologies could boost margins for some companies, large North American and Western European multi-nationals now face competitive pressures from emerging-market companies, technology giants, and digital platform-enabled smaller rivals, which will curtail their margins. This is a more difficult environment for investors.