Pictet has produced a top-down analysis of the structural dynamics of the global economy over the next decade. According to this analysis, big governments, rising inflation and climate change will influence return expectations.
Pictet Wealth Management presents the 10th edition of "Horizons", wherein the wealth experts forecast the 'return of the strong state' as an overarching trend within the next 10 years. It is to determine the approach to strategic asset allocation. They expect highest net returns in private markets, technology and Asian equities. "The pandemic has forced governments to intervene, restricting economic and social freedoms in the interest of public health. The likelihood that governments will continue to intervene is one of the key factors we have factored into this year's Horizonte long-term forecasts," said Christophe Donay, head of asset allocation and macro research at Pictet Wealth Management.
These 10 trends and themes will shape the investment landscape
Pictet Wealth Management identifies 10 trends and themes that are likely to shape the investment landscape across the 53 asset classes surveyed.
Experts believe the return of 'big government' will weigh on long-term returns. The economic upheavals of the past four decades, they say, have produced a number of negative externalities that can be managed either through positive market stimulus or government intervention, with the U.S. representing the former, China the latter and Europe the middle.
The great divergence, the mismatch between debt and economic growth, is a source of financial instability, experts say. More and more debt would be used to generate less and less real growth. Debt sustainability is therefore a key issue for long-term outcomes, they said.
A wave of innovation is currently maturing, which will have an impact on returns, the experts continue. The technological revolution has reached the maturity stage, and a new wave of innovation may be a few years away. The Nasdaq's outperformance of the S&P 500 is likely to stall over the next decade, they say. Experts expect tech stocks in the Nasdaq 100 to generate a real return of 4.9%.
After four decades of steadily declining inflation, Pictet's central scenario is a transition to a regime of higher inflation in most countries. Behind the sudden acceleration in prices that began in mid-2020 due to temporary imbalances between supply and demand lie deeper structural dynamics, the experts explain. This makes a change in the inflation regime over the next decade quite possible, with annual inflation of 3% expected for the US.
Climate change and inflation should support real economic growth. The experts believe that the investments needed to address climate change should boost long-term growth. Wage increases, necessary to control the risk of increasing social and political instability, would play an important role in addressing the rising cost of living and sustaining growth. Experts expect real economic growth to continue over the next decade despite the return of higher inflation.
Real versus nominal returns: After years of very low inflation, the distinction between real and nominal yields has virtually disappeared, the experts said. Meanwhile, the transition to higher structural inflation will again lead to a stronger contrast between expectations for real and nominal yields.
The experts also expect strongly negative real yields on cash and government bonds. The return of inflation strengthens the experts' long-standing argument that cash is a capital erosion machine. The same statement applies to government bonds, they said.
Higher inflation should make funded asset allocation more attractive, experts say. The focus will increasingly be on asset allocations based on asset classes that protect capital in real terms, they say. Real assets would meet these requirements.
Private debt and inflation-linked bonds could optimize diversification, the experts advise: private debt and inflation-linked bonds would be an integral part of any endowment style approach, as they should enhance the real returns of a strategic asset allocation.
The design of an appropriate strategic asset allocation would depend on the proper definition of investors' objectives. The experts believe that an endowment-style approach is appropriate to the economic and financial environment. Increasing financial instability, changing inflation, and the need to increase allocation to real assets required a very precise definition of investor objectives. Among the various parameters used to define the investor profile, the goal of real profitability - along with the investment horizon and risk tolerance - remains key for the experts.
Source: Pictet Wealth Management Horizonte 2022