Investors can expect to earn between 6% and 7.6% per year on their portfolios over the long haul, as equities average between 7.3% and 7.8%, suggest TD Bank economists in a special report.

TD makes this forecast based on long-term projections for inflation, productivity, labour market conditions, economic growth, and corporate profits. These forecasts are then used to infer what the future returns for various major asset categories might be and from them derive an expectation for portfolio returns.

It focuses on three asset categories: cash, income and equities. The return on cash is forecast to average 4.4%. “This is higher than the current yield and is consistent with a neutral stance to monetary policy by the Bank of Canada, which we estimate is broadly in line with an overnight rate averaging approximately 4.5% — representing a real overnight rate of 2.5% plus 2% for inflation,” it says.

“Over a long time horizon, there will be periods when monetary policy is accommodative, with low interest rates like today, and periods when monetary policy is restrictive, but they should average out over time,” TD predicts.

The projected return on income is 5.6%. TD says that its forecast is based on the expectation for monetary policy to average a neutral stance over the next 10 years, which will boost the level of yields from those that exist today. “However, the overall return will be less than in the past, reflecting lower term and inflation risk premiums,” it notes.

TD reports that since 1995, the SCM Universe Bond Index has provided an average annual return of 7.73%, “with a trend decline in bond prices producing capital gains that added to the interest payments from the bonds”.

“In our opinion, the secular bull market that was fuelled by declining inflation expectations is over and future capital gains and capital losses should largely offset one another,” it says. “As a result, the return will be dominated by the yield on the instruments, and the yield will be constrained by more modest term and inflation premiums.”

Equities are expected to provide an average annual return between 7% to 8% over the next 10 years. “Based on projections for labour force growth, productivity and inflation, one can assess the prospects for corporate profits in Canada, the U.S. and in the other major industrialized countries. Assuming relatively stable price-to-earnings multiples, the benchmark indexes should roughly parallel the growth in underlying profits, which in turn should generally track nominal GDP growth,” it says. Adding on dividends, the total return for Canadian equities is expected to average 7.3%. Higher productivity and labour force growth south of the border is expected to generate 7.8% on U.S. equities. Meanwhile, slower labour force growth but higher dividends are expected to put international equities in the middle with 7.5%.