Pictet Group
Horizon 2023
Thorough research, robust frameworks and extensive experience are critical to inform long-term investment decisions. This is what Horizon is truly about.
Editorial by Alexandre Tavazzi and César Pérez Ruiz
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Alexandre Tavazzi
Head of CIO Office & Macro Research
Pictet Wealth Management -
César Pérez Ruiz
Head of Investments & CIO
Pictet Wealth Management
Dealing with scarcities
This is the 11th year that we publish our 10-year return projections for various asset classes in Horizon. While the range of asset classes we cover has grown over time, we can now see how accurate were the forecasts we made back in 2013. Without wishing to blow our own trumpet too much, we are happy to report that we were not too far off the mark in many instances (see article ‘A respectable scorecard’).
We are also satisfied that some of the major themes we highlighted in previous editions of Horizon have indeed moved to the top of the strategic investment agenda. The signature theme of last year’s edition, ‘The return of big government’, has since gained further in relevance as we watch states throughout the world wrestle with unprecedented energy and security challenges. Indeed, the centrepiece of this year’s edition – scarcity – can be seen as an extension of this theme.
In our report, we look at what various forms of scarcity mean for strategic investment decisions. The most obvious scarcity concerns energy resources and commodities. Over the past year, Europe has shown an impressive ability to quickly overcome the cutting off of natural gas supplies from Russia. But it remains to be seen whether it can repeat this feat should conditions next winter prove more extreme than in 2022–2023. In addition, the ending of dependency on Russian gas has been replaced by dependency on gas from other sources. And in the global scheme of things, there is the risk that Peter is being robbed to pay Paul – in other words, that finite gas supplies will go primarily to rich European countries able to pay inflated prices, leaving poorer countries to do without. The same could prove true in other areas where geopolitics is complicating matters. We already see rich countries scrambling to secure difficult-to-exploit rare earths and corner access to state-of-the-art semiconductors.
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10 essential messages
Secular outlook
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1. Scarcity of natural resources and labour will weigh on growth potential
Increasing competition for natural resources and the drop in working-age populations across most major economies will be major issues in the next 10 years. Scarcities of these sorts will affect economic growth potential and put upward pressure on inflation.
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2. From monetary dominance to geopolitical dominance
After years of policy experiments and activism, we believe the significance of central banks to the global economy will be dwarfed by an increasingly fraught geopolitical environment marked by decoupling, ‘friend-shoring’ and strategic rivalry.
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3. Higher inflation is the new normal
While the post-covid surge in prices is in the process of being unwound, we believe that inflation will remain structurally higher than before the pandemic as a result of demographic changes, the cost of the energy transition, tensions in raw material prices and the increased importance accorded to supply security.
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4. We expect a new style of monetary policy
We foresee a new style of monetary policy making, one in which central banks will need to make a clear distinction between two objectives: ensuring financial stability (with potential interventions in the financial system) and ensuring price stability (thus keeping rates relatively high). We expect central banks to pursue these objectives in parallel.
Expected returns
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5. Real returns from cash are set to turn positive in some places
After years of negative rates, the interest rate offered on cash deposits has been rising again, thanks to central banks’ aggressive fight against inflation. More interestingly, the real rates (after inflation) to be earned from cash and cash-like instruments is turning positive. Cash could therefore again be considered an asset class in its own right than a place simply to park money before seizing other investment opportunities.
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6. Fixed income to provide decent carry again
We believe bond yields will be higher than in recent years as above-target inflation obliges central banks to maintain a tough policy stance. We believe the steep increase in bond yields since 2022 represents a regime shift and is unlikely to be fully reversed. We therefore forecast long-term government bonds in developed-markets (except Japan) to continue to offer handsome positive carry.
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7. Corporate margins will come under increasing pressure
The capital expenditures involved in securing supply chains, the chance that workers gain the upper hand against management and the overall cost of ‘de-globalisation’ will play a role in pushing corporate margins down in the coming 10 years. Interest rates and taxes are other factors pushing in this direction. We believe corporations will really begin to feel the effect of central banks’ rate-hiking campaigns on their funding costs in 2024. Corporations will also face increasing tax pressure. The decline in margins is factored into our return expectations for developed-market equities. Our forecast is that margins will suffer more in the US than in Europe.
Strategic asset allocation
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8. Private debt’s prospects will improve after central banks’ hiking cycle
We remain convinced that private debt has the potential to make an important contribution to the diversification of strategic asset allocations. We believe private lending by non-banks is set to increase – in part because of the recent turmoil in us regional banking and in part because of the scope for nonbanks willing to hold loans over the long term to extend lending tailored to borrowers’ specific needs. Over the past year and more, private credit has already shown its resilience in the face of inflation and rising interest rates.
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9. The endowment style of investing retains its potential
The endowment style of investing is characterised by a focus on the pursuit of superior long-term returns and an ability to tolerate significant short-term volatility. This involves significant investments in alternatives at the expense of more liquid instruments like stocks and bonds. While they were not unaffected, the exposure of US endowment funds to alternatives cushioned the performance of US endowment funds in 2022, a difficult year for financial markets in general. We expect that an endowment approach will stand investors to good stead in the years ahead in a climate marked by higher interest rates and inflation than before.
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10. The risks to our economic and asset return forecasts are set to increase
The dispersion of returns between assets and within asset classes like equities may be a ‘good thing’ for active investors. Dispersion may increase as central banks step back and unwind their securities holdings. The alpha opportunities to be had from identifying the winners and losers during such dispersion could well grow. But while there are ways to embrace uncertainty, the pace of change in economies and markets makes forecasting more fraught than ever.
A respectable scorecard
Our forecasts 10 years ago for a range of asset classes proved to be not too far from the mark.
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