After having updated our long-term (10-year) expectation models for shares at the start of October, a picture is emerging of further strained pricing in the stock market.
This is particularly true of American shares, where our models indicate an annualised nominal return of just 4.3% measured in dollars. Unfortunately, periods with poor expectations are typically associated with higher volatility. For the moment, the VIX – the so-called fear index – is at a historic low, which indicates that poor returns can be postponed for a while. However, it is clear that risk-adjusted returns on American shares will continue to be rather disappointing.
There is a rosier picture for European shares, where we can expect 5.8% in annualised nominal returns measured in euros. Even though this is higher, it is not impressive. European-based investors can, however, avoid the volatility that the indirect exposure to the euro/dollar exchange rate will cause in American shares.
Overall, it looks like the risk-adjusted returns in European shares over the coming year will be considerably better than in American shares.
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