Christophe Donay, Head of Asset Allocation & Macro Research - Nadia Gharbi, Senior Economist - Jacques Henry, Team Leader – Cross-Asset et Julien Holtz, Emerging Markets Strategist Pictet Wealth Management.

For the 10th time, Pictet Wealth Management has published Horizon, its top-down analysis of the structural dynamics at work in the global economy in the decade ahead. For the next 10 years, Horizon predicts the return of ‘Big Government’ as economies struggle to grow to be the overarching trend shaping the approach to strategic allocation, and predicts highest net returns in private markets, tech and Asian equities.

“The pandemic forced governments to intervene to restrict economic and social freedoms in the interest of public health. The possibility that governments continue to intervene is one of the main factors we consider in the long-range forecasts in this year’s Horizon.”, says Christophe Donay, Head of Asset Allocation and Macro Research at Pictet Wealth Management.

On this backdrop, the Pictet Wealth Management team sets out 10 trends and issues expected to shape the future of investing across 53 asset classes. These are:

1. The return of the big government will weigh on long-term returns. Economic upheaval over the past four decades has generated a number of negative externalities. Such externalities can be dealt either through positive market incentives or state intervention, with the US representing the former, China the latter and Europe positioned somewhere in the middle of the two.
2. The Great Divergence, the mismatch between debt and economic growth, is a source of financial instability. Since 1980, real economic growth and debt have increasingly diverged. The growth of such divergence suggests that it takes more and more debt to generate less and less real growth. As such, debt sustainability is a central issue for our long-term perspective.
3. The current innovation wave is maturing, with implications for returns. The technological revolution that commenced over 10 years ago has reached the maturity stage and a new innovation wave may be a couple of years off. Over the past 10 years, the Nasdaq has outperformed the S&P 500 by 72 percentage points, an average of 6 percentage points per year. This outperformance is likely to stall in the next ten. We expect tech stocks in the Nasdaq 100 to deliver real returns of 4.9%
4. After four decades of steadily declining inflation, a shift toward a regime of higher inflation in most countries is our central scenario. After peaking at between 12% and 15% annualised in the early 1980s, the inflation rate fell steadily to about 1% in some developed markets just before the pandemic . The sudden acceleration in prices that started in mid-2020 due to temporary supply-demand imbalances hides deeper structural dynamics. That makes a change in the inflationary regime over the next decade a distinct possibility, with annual inflation of 3% expected for the US.
5. Climate change and inflation should both support real economic growth. Just as the investments needed to deal with climate change should boost long-term, so should the wage rises made necessary by the risk of increasing social and political instability. These wage rises will also offset some or all of the increase in the cost of living that lies ahead. Thus, we continue to expect real economic growth over the next 10 years despite the return of higher inflation.
6. Real versus nominal returns: a necessary readoption. After years of very low inflation, the distinction between real and nominal returns has virtually disappeared in normal discourse and even from the calculation of returns and relative performances. The change to a regime of higher structural inflation should lead to a starker contrast between the expectations for real and nominal returns. For example, we expect highest real returns in Private Equity and Venture Capital (6.1% respectively versus an expected 9.2% nominal return), Nasdaq 100 returns (8.0% nominal versus 4.9% real returns) and Asian Equities (7.4% nominal versus 4.4% real returns).
7. We expect deeply negative real returns on cash and sovereign bonds. The return of inflation strengthens our long-standing argument that cash is a capital-erosion machine. The same message holds true for sovereign bonds. Although they retain their status as a hedge and diversifier in the event of an equity shock, the negative real returns we expect from sovereign bonds means their capital value will diminish over time.
8. Higher inflation should increase the attraction of the endowment style of asset allocation. There will be an increasing focus on asset allocations built around asset classes that actually protect capital in real terms. Real assets fit that bill.
9. Private debt and inflation-linked bonds can optimise diversification. Private debt and inflation linked bonds, will form an integral part of any endowment approach to investing, as they should improve the real returns of a strategic asset allocation.
10. Designing an appropriate strategic asset allocation depends on the proper definition of investors’ objectives. The increasing sources of financial instability, the changing inflation regime, the need to increase allocations to real assets all require a very precise definition of investor objectives. Among the different parameters used to define investors’ profiles, their objective in terms of real profitability remains key, alongside their investment horizon and their willingness to take on risk. We continue to consider an endowment-style approach as appropriate to the economic and financial environment.