The fund group believes investors should shun the traditional 60/40 equity/bond model and increase allocations to alternatives, with local currency emerging market debt and listed infrastructure looking attractive.
An analysis of long-term economic trends published by Aberdeen’s multi-asset team said government bond returns are likely to remain suppressed for the next decade, adding current low yields will struggle to generate a return above 1%.
Interest rates might rise a little, but are unlikely to return to the levels previously considered normal, the group said.
Meanwhile, it expects equity returns to be modest compared to the recent past, particularly in markets where valuations have become stretched.
Aberdeen said equity markets face long-term headwinds of worsening demographics, poor productivity and an end to China’s credit boom, which could slow both its own and the world’s economy.
Craig Mackenzie, senior investment strategist at Aberdeen, said : “Equities and bonds will still be vital to many investors’ portfolios. But this is a poor environment for traditional 60/40 equity/bond asset allocation models.
“For decades investors have been combining equities with government bonds to achieve diversified portfolios. This worked very well when government bonds produced a 6% return, but it will work badly when returns are only 1%.
“We think local currency emerging market debt may offer returns of 6%. Emerging market governments have learned from the past and their economies are now run more prudently. Attractive returns are also likely from listed infrastructure investments in roads, hospitals and windfarms.”
Last week, Seven Investment Management announced it had upped its alternatives exposure to its highest-ever levels in response to high stock market valuations, low bond yields and concerns about political instability brought on by the hung parliament.