No one can say for certain what will happen to the market over the next few years but certain valuation measures can be useful in estimating the expected long-term return of the stock market for those who buy at a particular levels. Research Affiliates, an American company specialising in long-term return predictions are forecasting annualised real returns –that means on top of inflation in excess of 5pc over the next decade.
Tom Becket, who buys funds for Psigma, said: “If one assumes that inflation will average 2.5pc over the longer term, then we would be forecasting a long-term real return of 4.5pc, very close to the long historical returns since 1969.”
Simon Murphy, a UK fund manager at Old Mutual, said, “When you look back at history there is a powerful relationship between historical earnings growth and the current market dividend yield. This does not mean it will be a smooth ride, far from it, but on a 10-year view I broadly agree with the assumptions made because UK shares are sensibly priced.”
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