Small-cap stocks, high-yield bonds and venture capital investments have a bright future in the U.S. over the next 10 years, but none will outshine the returns on Japanese equities, according to a survey by KPMG Investment Advisors.

Financial professionals interviewed by KPMG believe Japanese stocks will be the best-performing asset class over the next decade, while Japanese bonds are forecast to generate the lowest returns in the international fixed-income arena.

Portfolio managers are looking for small-cap issues in Japan to generate annualized gains of 12.3% during the 10-year period, compared with a 9% return for small- and mid-cap stocks in the U.S. Respondents said they expect large-cap names here to jump 8% per year over the next decade, while venture capital investments should produce annual gains of 10% going forward.

Another area of strength lies in high-yield bonds. In fact, money managers forecast solid returns of around 9% in 2003 and 8% over the next five and 10 years. Municipal and mortgage-backed bonds also should do well, but other fixed-income securities are expected to underperform equities, as the three-year bear market gives way to better economic times. Portfolio managers believe the 30-year Treasury and five-year notes will yield 6% and 5.2%, respectively, between 2003 and 2012.

Internationally, emerging market bonds are slated to produce strong gains of 8.2%, while Japanese bonds are seen offering a meager 3% return for the 10-year period.

Respondents to KPMG's survey, who collectively manage more than $3.5 trillion, believe gross domestic product will grow by 3.5% in 2003, by 4.0% annually over five years, and by 3.8% annually over 10 years. Inflation, as measured by the change in the consumer price index, is projected to be 2% in 2003 and to average 2.5% over the next 10 years.

One area of concern is the federal budget deficit. Respondents expect the budget gap to widen to $275 billion over the next five years, as a result of the recently enacted tax cuts. Still, they think the deficit will narrow to $250 billion over the next 10-year period.

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