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McKinsey Report: Investors Should Prepare For 20 Years of Lower Returns

A recent report by McKinsey Global Institute urges investors to prepare for significantly lower investment returns in the coming decades.  The report outlines the overall investment returns over the last 30 years, noting that the exceptional returns over the period were due to an “extraordinary confluence of favorable economic and business fundamentals.”  The report cautions that the factors that drove those outsize returns are “weakening, and in some cases reversing.”  According to McKinsey, the following factors will contribute to declining returns:

  • The end of declining interest rates and inflation
  • The decline in global GDP growth as populations in the developed world and China age
  • The “cloudier” outlook for corporate profits.

McKinsey predicts that these factors may contribute to significantly lower returns for US and European securities.  The report estimates declines in equity returns of 150 – 400 basis points and even steeper declines for fixed income securities (300 – 500 basis points).  According to the report, the fallout from the lower returns would be wide ranging – including requiring individual investors to work longer or save more; increasing the funding gaps experienced by pension managers; and new fee pressures on asset managers.

While the report raises the possibility that its predictions may be overly pessimistic, the report encourages all investors to prepare for the potential new, more pessimistic reality.  “What is important is for investors of all types—individuals as well as institutions—to start managing their own expectations and the expectations of the people who will be affected by their investment decisions.”