Estimating Strategic Returns
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If you were transported 100 years into the future, what would be your expected 10-year equity return? In other words, knowing nothing about the price-to-earnings (PE) level, the shape of the rates curve or the political zeitgeist, what is the intrinsic strategic return of each asset class? From a tactical viewpoint, returns will vary significantly from these strategic levels. As an example, Figure 1 illustrates the UK 10-year compound return ranging from -2% to +26%. Now, of course, we do have market data which helps us understand whether an asset will be closer to its long-term minimum or maximum. However, these tactical considerations are variations on a strategic ‘anchor’.
