Even without making an assessment about the "valuation" of markets - determining if they reflect underlying fundamentals well - it seems to make sense to expect low future returns on (most) investments if there is less growth to come by in the world. Less growth leads to lower increases in future income streams for households, corporates and governments. If growth is not only lower in terms of activity, but also in terms of the price (what we call inflation) it means that expectations about future nominal cash flows will move lower as well. Since the discounted value of these future cash flows is what gives financial assets their value today, adaptation to a lower growth future creates direct challenges for asset prices and investor returns.

Taking these thoughts into account it seems not that strange that from a macro perspective markets are still priced for some sort of secular stagnation. A world of low "equilibrium" levels for central bank rates and bond yields. A world of low productivity growth and low inflation.

All this makes for depressing headlines for investors, so is there no way to rescue the future of investment returns? For starters it becomes even more important to prevent a potential negative shock from doing too much damage to your portfolio. It has always been hard to experience and recover from large drawdowns, but with less growth around it might be even harder. If growth remains too cold for comfort, bond yields will remain low and risky assets might initially continue to receive support from low yields and a continuation of a rise in the profit share of GDP.

However, when the next downturn hits, risky assets will be very vulnerable and their mutual correlation will quickly converge to one. Meaning that most of the traditional diversification benefits will disappear exactly at the moment you need them most. Only smartly balanced portfolios that also strategically maintain exposure to relatively safe assets that offer positive returns in a sharp risk aversion environment will be allowed to limit the damage of such drawdown in markets.

At the same time, it should also not be ignored that there could be positive surprise to the macro outlook. Despite all depressed expectations that have been building up over the last decade and the ongoing popularity of the secular stagnation thesis, technology and positive animal spirits can easily surprise us all to the upside. The remarkable Goldilocks economy that emerged in the 1990s, that started with an equally depressed mood, is just one of the many positive surprise stories that economic history teaches us.

The big question going forward will be whether growth will break the ceiling it seems to have been capped by in recent years. For that, a sustained rise in productivity and a virtuous cycle in global final demand would need to coincide. And why not? It might sound strange at first, but next to the secular stagnation argument it should at least be acknowledged that the global economy looks better than it has done for at least a decade. The global recovery is more synchronized from both a regional perspective (across DM and EM) and sectoral perspective (both consumption and investment contribution). Unemployment rates are at decade lows, profits are rising at a double digit pace and sentiment in the household and corporate sectors is close to post-crisis highs.

This provides no guarantees on longer-term growth trends, but since our global economy is a complex adaptive system it is always important to understand that such a system always has a lot of path-dependency. As a result, the constructive shorter-term dynamics might well contribute to pushing the economy on a stronger longer-term growth track. If all the new fascinating technological innovations in digitalization, robotics, healthcare, energy efficiency/sustainability and machine learning (amongst many other things!) would be leveraged to the full extent by stronger and more persistent demand.

In that environment bond yields can rise, while risky assets remain protected by higher productivity growth. What is will do with inflation along the way remains uncertain, and will trigger occasional bout of volatility in global markets as central bankers adapt their thinking and policies on the back of empirical observations. Still, it would lead to either a Goldilocks or reflation environment that would create ample opportunity to generate returns in risky asset space. Government bonds will struggle some or more in these scenarios, but higher yielding credits, real estate and equities stand to benefit.

No certainty at all, but certainly not something to ignore either. Leaving me with one simple message: stay open-minded and be adaptable!

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<blockquote class="twitter-tweet" data-lang="fr"><p lang="en" dir="ltr">The future is more uncertain. Always. But no downside tilt! Positive surprise is equally probable as a negative one. <a href="https://t.co/x6v81UNHlL">https://t.co/x6v81UNHlL</a></p>&mdash; V van Nieuwenhuijzen (@ValentijnvN) <a href="https://twitter.com/ValentijnvN/status/888030108056813568">20 juillet 2017</a></blockquote>
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