To The Moon

In case you were curious, I thought I would also include the same prospective equity risk premium indicator for developed markets and emerging markets (using their own government bond expected returns in place of treasuries).

As you can see, it is a starkly different story for EM & DM vs US.

The rest of the world is basically sitting there with a decent positive expected equity risk premium, while the US is sitting there deep in the negatives. This reflects higher expected returns for global ex-US equities (vs small negative for US), which in large part is driven by valuations.

I covered the detail behind this in a previous edition: “Chart of the Week - What to Expect“ — and n.b. for reference, the Capital Market Assumptions dataset is a key feature in our monthly Market Cycle Guidebook (in case you wanted the latest data + detail).

Again though, this is telling us loud and clear that the asset allocations that have worked well over the past decade may not work so well in the coming decade… and that’s a big problem, because most investors even in a professional capacity have drifted into portfolios optimized for yesterday’s returns (thanks to peer risk, returns chasing, and apathy/inertia).

Maybe my numbers will prove to be wrong, but maybe just maybe they are flagging one of the biggest shifts, risks, and opportunities facing asset allocators of this generation…

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