Each year, we comprehensively review our long term outlook, identifying the investment themes and asset class forecasts that underpin our portfolio construction. Higher interest rates and reasonable global equity valuations create a decent starting point for returns, but we expect restrained economic growth and increasingly tense global politics to keep returns modestly below long term historical averages. We've identified six key investment themes that drive our 10 year outlook. Let's explore three of those themes here.

High levels of government debt and aging populations already are restraining global economic growth. Adding to that, our outlook foresees investments in resiliency as global rivalries deepen and additional spending to address climate change diverts capital from more economically additive investment. Artificial intelligence may spur growth, but it demands large amounts of money and time before it can support the global economy. We expect growth to fall below long term trends, suppressing equity returns.

While global economic growth has backtracked, inflation persists. Tight labor markets, economic regionalization, and higher commodity prices will likely more than offset technology's disinflationary promise. Investors, consumers, and policymakers must adapt. Over the next 10 years, we expect the developed market annualized rate of inflation to come in at 2.4%. While lower than the inflation we've experienced in the past couple of years, our forecasts remain above the 2% level targeted by most central banks.

New, more permanent inflationary forces complicate central banks' abilities to reach their objectives. Over time, we think central banks will accept inflation somewhat above their stated targets versus accepting the economic consequences of overcoming persistent inflationary pressures. We believe central bank policy rates are close to peaking for this cycle and will start to decline in 2024. Accordingly, our average forecasted policy rates across the next 10 years are below today's levels for most major central banks.

We think these themes and other market forces will translate into below average equity returns over the next 10 years while bonds benefit from higher yields. For stocks, solid sales growth likely will be fueled by inflation, but falling profit margins from higher input and financing costs muddy the outlook for equities somewhat. Acceptable absolute performance for equities masks a less acceptable relative return when compared to fixed income yields.

We expect developed market equities to outperform emerging markets with help from comparative healthy revenue growth and US share buybacks. Emerging market equities, in particular China, also may be held back by deepening global political rifts, restraining their economies and financial markets. Higher yields drive our investment grade bond return forecasts, but stable interest rates may limit price appreciation.

The improving quality of high yield bond issuers, along with a stronger commodity sector, will likely keep defaults and credit spreads near long term averages, even if the global economy deteriorates. Elevated short term rates should support cash yields. With stubborn inflation keeping interest rates higher and the global economic restraints acting as a drag on equity returns, investors should take note of the shrinking gap between equity and fixed income returns going forward. Our 10 year forecasts call for a 5.7% annualized return for a portfolio invested 60% in global equities and 40% in US investment grade bonds versus the 6.2% annualized return over the past 10 years for that portfolio.

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