How climate change and higher inflation have affected our 30-year return forecasts

Tina Fong

Irene Lauro

Samar Khanna

Climate change and shifts in return forecasts underline how investors will need to work harder

• Tina Fong, Strategist at Schroders
• Samar Khanna, Environmental Economist at Schroders
• Irene Lauro, Environmental Economist at Schroders

Each year Schroders’ team of economists helps investors take a truly long-term view with 30-year return forecasts for a range of asset classes around the world.

These forecasts are unique because they include the effect of climate change, which is added on top of a set of building blocks to produce our estimates.

In Part 1 of our paper, we outline the methodology used to incorporate climate change into our return assumptions.

In Part 2, we discuss our 30-year forecasts for cash, bonds, credit, equities, and real estate, incorporating the impact of climate change and explain what has changed from our previous analysis.

This year, we are expecting higher returns across most asset classes in real and nominal terms, particularly among the fixed income markets.

Policymakers are likely to keep interest rates higher in response to inflation being more persistent. This has been driven by major shifts in the three areas of decarbonisation, demographics and deglobalisation known as the 3D Reset.

As higher cash returns drive up returns on all fixed income assets, the risk premium for owning equities will be lower. So, equity investors will need to work harder given the challenges of making equities a more attractive prospect than cash and sovereign bonds.

Meanwhile, the impacts of climate change on asset returns are uneven with winners and losers in different geographies. Despite the substantial downgrades in emerging market returns from the incorporation of climate change, they are still expected to deliver higher returns than most of the developed markets.

Investors will need to work harder

Our cash return forecasts, particularly for the developed economies, are expected to increase driven by our higher central bank policy rate forecasts. This is because central banks are likely to keep interest rates higher in response to inflation being more persistent.

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