The outlook for stocks looks promising. Markets are hitting historic highs amid falling interest rates in the United States and a resilient economy operating at near full employment, says Richard Carlyle, Equity Investment Director at Capital Group. “It looks like this year we’re going to see 15-17% earnings growth, which will lead to higher profits, dividends and share buybacks. »
Flavio Carpenzano, Fixed Income Investment Director at Capital Group, believes that the future of bonds, particularly credit, also looks favorable. “Bond investors will benefit from potential price appreciation as inflation falls, which will leave room for central banks to cut rates and revive the economy. »
Risk assessment
The standard way to measure risk in stocks is to look at volatility, but that’s not an ideal measure, especially over the long term, says Richard Carlyle. Additionally, for someone nearing retirement, investing all their money in stocks may not be prudent, even though the returns can be very attractive.
As long as the US economy remains as strong as it is, I believe we will see progress in the equity markets
Richard Carlyle, Equity Investment Director chez Capital Group
Regarding bonds, Flavio Carpenzano points out that we face uncertainties regarding growth, inflation and monetary policy, but credit spreads have remained fairly stable. “If part of your portfolio is invested in stocks, you should buy Treasuries because they provide diversification. »
“As long as the U.S. economy remains as strong as it is, I believe we will see progress in the equity markets. Stocks have historically provided high returns, and based on our current situation, as long as you extend your time horizon long enough, I’m confident they will continue to do so. » Richard Carlyle, Equity Investment Director at Capital Group
Take a long-term perspective
It can take three to four years for stock markets to recover from a decline, says Richard Carlyle, and market corrections of 20 to 25 percent can occur. Using the example of a person close to retirement, these factors must be taken into account. However, if the investment horizon is longer, then stocks are an attractive option.
We are now in an environment where interest rates are high, and therefore returns are high
Flavio Carpenzano, Fixed Income Investment Director chez Capital Group
When it comes to bonds, Flavio Carpenzano explains that a long-term perspective is also necessary, although a little shorter than for stocks. Bonds offer pretty good predictability. “If you buy a bond with a five-year maturity, you know that at the end you will get your $100 back, plus an attractive coupon every six months (unless, of course, the bond defaults). issuer). »
Flavio Carpenzano points out that, since the financial crisis, the income function of bonds has been less present, but he insists that 2022 was an exception. “We are now in an environment where interest rates are high, and therefore yields are high. Bonds are back! »
Looking to the future
In one of its regular publications, Capital Group projects 20 years into the future and attempts to calculate the expected returns of different asset classes. In euro terms, for example, the model suggests an expected return for stocks of around 7.2%, which is better than for overall euro bonds, says Richard Carlyle. “Stocks, relative to high-quality government bonds, according to our forward-looking figures, will offer about four percent extra return per year, and if you capitalize that over 20 years, that’s significant value. But of course, these are only projections and do not guarantee future returns: we never know what the reality will be.”
Flavio Carpenzano adds that if you have a five-year horizon, high-yield bonds can offer a similar return to stocks, but with less volatility. “You can diversify stock exposure with bonds without sacrificing returns. »
“Bonds are back: they once again offer diversification from stocks, and their current yield is high compared to the past. » Flavio Carpenzano, Fixed Income Investment Director at Capital Group
Conclusion
Both stocks and bonds offer attractive opportunities, particularly in the current macroeconomic climate. As with all investments, they involve risks. It is therefore important to remember the basic rule: aim for a balanced and diversified portfolio.
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