How has the coronavirus shock changed medium-term fundamentals? And how does that change our long-term asset views? Vivek explains.

The coronavirus shock is likely having profound impact on how the economy operates over coming years. It is reinforcing structural trends and introducing new ones, such as the policy revolution, surging sustainability wave and accelerating deglobalization. In many ways, it is accelerating the arrival of the future. This has led us to change our long-term return expectations – and shift our strategic asset class preferences away from nominal government bonds and toward credit.

The latest update to our capital market assumptions, or return expectations across asset classes, reflects market price moves as well as the virus shock’s potential impact on fundamentals, such as corporate earnings, default rates and medium-term inflation expectations. Our expected government bond returns have fallen across the board, and those for credit and equities have broadly risen compared to the end of 2019. Our five-year expected government bond returns are now negative across developed markets, as the chart shows. Yields have dropped sharply, and we expect only a gradual rise as we see monetary and fiscal policy coordination suppressing rates in coming years. This diminishes the strategic case for holding nominal government bonds.