Marlene Puffer, chief investment officer of the Alberta Investment Management Corp., believes many public market asset classes are under-priced as a result of inflation and interest rate hikes in 2022.

“The persistent rise in inflation caught many central banks off guard, forcing them to undertake the most aggressive interest rate hiking cycle seen in decades,” she wrote in the forward to a new report on the investment organization’s 10-year assumptions. “This resulted in a significant re-pricing of risk, which saw bond yields rise and global equity values fall. The silver lining is that valuations across many public market asset classes have become more attractive.”

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The report includes 10-year return and risk forecasts for 17 asset classes. By taking into account both the long-term return and risk expectations, the AIMCo predicts a balanced fund composite of the products they offer to their clients will achieve 10-year annualized returns of 7.7 per cent, 0.9 per cent lower than in the previous decade.

According to the analysis, public emerging markets equities will offer the highest returns of any asset class. It expects the MSCI emerging markets net total return index to grow by 12 per cent on a per annum basis, with 14 per cent volatility.

The AIMCo projects Canadian equities, as measured by the S&P/TSX composite total return index, will outperform global equities listed on the MSCI world net total return index, with annualized growth of 9.7 per cent compared to 9.5 per cent. On a risk basis, it expects Canadian equities will see volatility of 14.2 per cent during the period compared with 11.8 per cent on the global level.

According to the report, domestic equities are likely to be hindered by a slowing Canadian economy. “Consumer spending may ebb downward as excess accumulated savings during the pandemic wear off and the housing market decelerates further. This could lead to growth around zero per cent in 2023.”

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The AIMCo also anticipates more muted growth from alternative asset classes. It expects Canadian real estate, as measured by the REALpac/IPD Canadian all property index — large institutional subset, will grow by 5.3 per cent each year with volatility of 7.6 per cent. And it expects foreign real estate to grow by 5.7 per cent on a per annum basis with volatility of 7.4 per cent.

Using information from Statistics Canada, similar international sources and market data, the report also analyzed private equity, infrastructure and renewable resources asset classes. The AIMCo expects private equity will generate returns of 11.3 per cent with volatility of 15.5 per cent during the period, while infrastructure will grow by 7.2 per cent with volatility of 11.1 per cent and renewable resources will generate 5.9 per cent with 11.1 per cent volatility.

In analyzing each asset class, the AIMCo collaborated with AlphaLayer, a joint venture with Edmonton-based AltaML Inc. and AIMCo, that specializes in machine learning. AlphaLayer helped to better model risk and correlations for alternative or private and illiquid asset classes where a lack of historical data can make modelling more challenging.

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