Salient to Investors:

Since 1926, intermediate US government bonds earned about 2.5% above inflation, stocks about 7% above inflation. Currently TIPS yield negative 0.5%.

Assuming stocks continue to outperform bonds by 4.5%, then future real returns on stocks will only be 4%, and on a 60-40 balanced portfolio will only be 2.5%.

Therefore, central banks’ negative real interest rate policy significantly worsens the risk-return tradeoff for everyone. If investors accept lower return expectations, they must either defer retirement, save more, and/or reduce spending in retirement.

Emerging markets local currency bonds yield near 5% along with strong fiscal balance sheets. Long-term, expect some currency appreciation from the faster underlying growth rates of emerging markets economies.

REITs are a likely beneficiary of low long-term borrowing costs, even in a sluggish recovery.

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