From 1985 to 2014 total returns on equities and bonds in the United States and Western Europe were significantly higher than the long-term average, driven by an extraordinary confluence of favorable economic and business fundamentals, MGI reports.
These include sharp declines in inflation and interest rates from peaks in the late 1970s and 1980s, and strong global economic growth fueled by positive demographics, productivity gains, and rapid growth in China.
"Corporate-profit growth was even stronger, reflecting revenue gains in new markets, declining corporate taxes, and advances in automation and global supply chains that helped rein in costs. Publicly listed North American companies alone increased their posttax margins by 65 percent in this three-decade period," MGI wrote.
The analysts also predicted the returns on investments in the United States and Western Europe over the next two decades and found that in both regions average annual returns for equities could be 1.5 to 4.0 percent lower.
"A two- percentage-point difference in average annual returns over an extended period would mean that a 30-year-old today would have to work seven years longer or almost double her savings to live as well in retirement," MGI wrote.
A sustained period of low returns could also have a broader economic and political impact, if, for instance households were to raise their savings rate substantially to make up for the shortfall in investment returns. This could depress demand, additionally hindering growth and exacerbating the effects of low returns.
