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7 Jan 2020 – Insights

Investments: Goodbye to a decade – how will the next turn out? 

Danske Bank’s investment strategy team take stock of the past decade in the financial markets and outline their expectations for the coming ten years.

Whereas the opening decade of this millennium was something of a nightmare for investors, with both the collapse of the dot.com bubble and the financial crisis, the past decade has handsomely rewarded investors overall. Both equities and bonds have provided strong returns, and according to Danske Bank’s chief strategist, Henrik Drusebjerg, two factors in particular have driven the financial markets over the past ten years:

“Investors and companies have ridden on a wave of declining interest rates and economic highs, and central banks are a major reason for this. They have injected huge sums of money into the global economy and sent interest rates down to levels we had never imagined at the start of the decade, and this has help to buoy up the longest upswing since World War 2,” he explains.


Returns during the past decade 

But how good has the past decade actually been? We have looked into the figures. 

  • Global equities have generated an average annual return of 12.1%, with US equities in particular pulling higher – driven forward by digital giants like Amazon, Facebook, Apple and Alphabet.

    Danish equities have given an annual return of 15.2%, with Novo Nordisk being a prime mover here. Part of the story, of course, is that equities got off to a flying start, as they were still in the midst of a rebound following the major price falls during the financial crisis.

  • When yields and interest rates fall, bond prices rise, so the declining interest rates of the past decade have therefore produced solid capital gains on bonds. On top of this come the regular interest or coupon payments, meaning global government bonds have given an average annual return of 4.6% overall, while the equivalent figure for global corporate bonds is 6.8%.



Bonds simply cannot repeat their previous performance 
When Danske Bank’s chief strategist looks towards the future, one factor in particular will be guaranteed to differentiate the coming decade from the previous: interest rates are now so low that a repeat performance of the past ten years’ fall in yields is impossible, and this is crucial for the return prospects for bonds.

“You could almost say that bonds have won something of a pyrrhic victory over the past decade. The regular interest or coupon payments made to investors from investment grade bonds, such as Danish government and mortgage bonds, are now extremely modest, while investors at the same time can hardly expect any noticeable increase in prices – in fact, quite the reverse. This all points to very limited returns from this type of bond in the coming decade, and at worst these returns could be negative,” says Henrik Drusebjerg.

Danske Bank has no official 10-year return expectations, but every year the Rådet for Pensionsprognoser (‘Pension Forecast Council’) sets the return expectations that Danish pension firms base their pension forecasts on for their customers. The Council’s return expectations for government and mortgage bonds is currently 0.3% annually for the coming 10 years.

However, Henrik Drusebjerg stresses that despite their modest return expectations, bonds should continue to account for a share of most investors’ portfolios. 



This is how much EUR 1,000 grew during the last two decades by investing in …

As of 13.12.2019, based on MSCI index (equities) and ICE BofAML index (bonds). Bond index only for developed markets. Total return in EUR. Historical return is no guarantee of future return. Source: Macrobond.


Expect more modest returns from equities 
According to the chief strategist, equity investors should also prepare for more modest returns in the coming ten years.


We are in the late phase of an economic upswing and will probably face a recession in the coming years. That is not necessarily a disaster for equity markets, but we should expect a setback of some sort, whether smaller or larger, before equities slowly but surely pick up and progress from there.

Henrik Drusebjerg

Chief Strategist, Danske Bank



Henrik Drusebjerg also points out that periods of very high returns are often followed by periods of more subdued returns.

“The technical term is a mean reversion, which describes how equities have a tendency to revert back to their long-term average return. You could also say equities possess a certain elasticity, and over the past decade that elastic has been well and truly stretched, with returns markedly above the historical average,” he says.

Financial experiment could backfire 
Henrik Drusebjerg characterises the central banks’ historically accommodative monetary policies since the financial crisis as the world’s largest financial experiment, and it could come at a cost:

“Central bank monetary policy has been a tailwind for the past decade, but there could be negative consequences in the slightly longer term. Central banks, for example, now have far fewer resources at their disposal to address future crises, and there are almost certainly other consequences we simply have not yet reckoned on. This is clearly an uncertainty factor for the next ten years,” he says.

Emerging markets gaining ground 
Return expectations from the Rådet for Pensionsprognoser are 5.5% annually for equities in the devloped markets in the coming decade and 9.5% annually for equities from emerging markets. 

“At Danske Bank we agree that return potential is greatest in emerging markets, even though forecasting 10 years ahead is generally close to an impossible task. Past decades have seen emerging markets account for an ever expanding share of the global economy, and we expect this trend will remain intact in the coming decade. However, investors should be aware that risk is also higher in emerging market equities,” he says.

This content is not investment advice - you should always speak to an advisor about how a possible investment matches your investment profile before making an investment.