Peter van der Welle (left) and Laurens Swinkels

Asset returns will remain below long-term historical averages over the coming five years due to the low risk-free rate according to analysis from global asset management firm Robeco.

The risk-free rate is the rate of return offered by an investment that carries zero risk.

The Dutch firm with operations in Australia has published its twelfth annual Expected Returns report which covers what investors can expect over the next five years for all major asset classes, along with their macro-economic predictions.  

Robeco has framed the lead up to 2027 as “the age of confusion” due to energy and food crises, double-digit inflation in developed countries, and China’s trajectory as the largest contributor to global growth. 

The report also noted the impact on inflation made by fiscal stimulus in response to the Covid-19 pandemic and the war in Ukraine. 

“In our view, we have now entered the age of confusion,” the report stated. “This heightened uncertainty is reflected in volatility almost doubling in analyst forecasts of 12-month forward global earnings estimates compared to pre-Covid levels.” 

Robeco multi-asset strategist Peter van der Welle said the bar for inflation becoming entrenched is high but recissions tend to be disinflationary. 

“However, a right-hand skew to the expected inflation frequency distribution for developed economies is a key thread for 2023-2027.” 

The analysis predicts an expected equity risk premium of 3 per cent, which is a first in the 12-year history of the publication. 

Robeco researcher Laurens Swinkels said the future has become less predictable particularly with the potential consequences of climate risk. 

“The exact magnitude of climate change over the next decades is uncertain, and its impact on asset prices is even more unclear. However, what we do know is that asset allocators need to seriously consider the long-run impact of climate change on asset class returns.” 

Robeco foresees little to no impact from climate change on developed government bonds and investment grade corporate bonds, but it stated there is a “slightly negative signal” for equities to due lower economic growth. 

Commodities received a “positive” climate signal which is attributed to the energy transition and physical climate risks that are putting pressure on commodity prices.