- Investment Strategy Analyst
Asset classes
Hong Kong (香港), Individual
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Despite a challenging macro and geopolitical backdrop, global equity markets have performed strongly year to date. Global equities, represented by the MSCI AC World Index, are up around 15% since the start of 2025, continuing the robust performance of the past few years. This ongoing resilience might surprise some investors, especially given the high annual returns of around 20% that global equities have enjoyed since the end of the 2022 bear market.
Part of the misconception may stem from investors’ tendency to anchor equity expectations to the long-term average return of 7% – 10% per year — an average that’s skewed downward by bear markets. As the chart below illustrates, when looking only at calendar years with positive equity returns, the average return jumps to nearly 20%. This nuance is critical: strong years aren’t outliers — they are a recurring feature of market cycles.
This pattern also extends beyond equities. Investment-grade credit, typically a lower-risk asset class, has historically returned 6% – 7% in up years. And the performance of high-yield credit has been even better, with average annual returns of 11% – 12%.
The bottom line? Evaluating the return potential of asset classes as a range of possible outcomes rather than relying solely on long-term averages may lead to more realistic expectations about performance across market cycles.
Investment implications
- Don’t be deterred by strength. The 15% – 20% rise in equities this year shouldn’t be a cause for concern. Unless you’re expecting a downturn, strong rallies aren’t inherently a signal to derisk. Historical data supports the idea that outsized returns are common in up years.
- Downside mitigation is key. Limiting the downside impact can have a significant impact on long-term average returns. Consider managers who demonstrate strong upside participation while minimizing downside exposure, such as defensive equity managers, hedge funds, or explicit hedging strategies that seek to reduce drawdowns.
- Observe the skew in the chart. Asset classes with a favorable return profile — meaning strong upside years and relatively mild losses in down years — such as credit, can be particularly useful to allocators. In contrast, commodities tend to show a more balanced pattern between gains and losses. In these cases, active management may help to introduce or enhance a positive skew in portfolio outcomes.
What we’re watching
- Catalysts for higher structural growth that may extend the cycle, including fiscal stimulus, policy reform, and potential rate cuts by central banks.
- The likely path of inflation and potentially higher cross-asset correlation. While central banks have made meaningful progress in easing inflation and tariffs have yet to stoke reinflation, potential catalysts like global fiscal expansion and trade policy remain risks to monitor.
- Corporate earnings growth broadening across sectors. Within the US, mega-cap tech has led the market rebound. While sustained earnings growth is supporting the bull run, a broadening of that growth across sectors beyond mega-cap tech is key to a more balanced and durable market rally.
Experts
- Product Reporting Lead
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