After a good year, many investors will be wondering if the market can go higher from here or if it might be a good time to sell.
At such times, it is useful to take a step back and consider what the stock market will do over longer time periods.
JPMorgan earlier this month released their outlook for the next 10-15 years.
The bank predicts that, in inflation-adjusted terms, $1 will be worth $1.04 a decade from now if invested in cash. But the same $1 will be worth $1.54 if invested in a mix of stocks and bonds.
Next consider the asset allocation model of Research Affiliates (RA).
RA predicts that, again in inflation-adjusted terms, $1 will be worth $1.08 a decade from now if invested in cash. But it will be worth $1.97 if invested in stock markets outside the United States.
Whichever model you look at, the message is clear. Despite higher interest rates, investors will be better off in stocks in the long run, compared to cash.
If there is debate about something, it is about the long-term prospects of the US stock market. JPMorgan is relatively optimistic, predicting 4.5% annual returns (after inflation). Research Affiliates believes returns will be lower, only 2% a year. The difference comes down to how much each house believes valuation will drive returns, and to what extent the higher valuation of the US market is justified due to the US’s leading position in artificial intelligence.
For my part, I’m in the Research Affiliates camp. I believe the US market will struggle to make progress this decade.
Be it as it may, a key message from both publications is that non-US markets should outperform US markets. The starting valuation of non-US markets is lower, and non-US markets contain more companies that benefit from higher interest rates. The US outperformed massively in the 2010s; in the 2020s this will probably reverse.
The overall message from the two publications is positive. Investing in non-US stock markets should return about 7% a year after inflation, leading to a doubling of the purchasing power of capital invested today over the next 10 years. That is a good return that far beats investing in cash.
Credicorp was sold following a strong run.