Pictet Asset Management expects commodities, private markets and emerging markets to drive investor returns over the next five years
“The next five years will present a shake-up to existing approaches to asset allocation as developed market growth stalls”, says Luca Paolini, chief strategist at Pictet Asset Management.
“We expect returns from equity markets to fall as the global economy approaches the end of its expansionary phase, tighter financial conditions, a peak in US jobs growth and larger output gaps which all point to a recession within the next two years.
“Our research shows that double-digit opportunities are achievable across emerging markets and other high-risk assets in the alternatives spectrum. Beyond commodities, we see value in gold, infrastructure, real estate and private equity which will require plotting a new course for investors in terms of asset allocation.
“Emerging market stocks – Chinese equities in particular – look attractive, while emerging market bonds income-boosting potential is enhanced by what we believe will be a steady appreciation in developing world currencies.
“We forecast that commodities outside of the energy complex could returns well in excess of inflation over the next five years. Our analysis shows real estate and private equity should each outperform developed market equities over our five-year forecast horizon boosting a portfolio’s return while gold and infrastructure help diversify its sources of risk.
“Developed equity markets face a squeeze on corporate profit margins. With wages and raw materials prices rising, more stringent regulations adding to the costs of doing business and the prospect of rising corporate taxation, margins we believe are set to fall across all major markets.
“Outside of the US, returns from developed market fixed income will fall below inflation over the next five years.
“We believe the 2022 inflationary surge will broadly prove to be relatively short-lived, although higher volatility of outcomes will persist ranging between 2 per cent and 3 per cent across much of the developed world.
“As supply bottlenecks caused by Covid start to unblock and the impact on commodity prices of Russia’s invasion of Ukraine begins to fade, price pressures will dissipate.”
Arun Sai, senior multi asset strategist at Pictet Asset Management, adds:
“Disruption across The Internet and digital economy will proliferative across the next five years, with the next generation of the world wide web, Web 3.0 set to reconfigure the investment landscape.
“A crucial distinguishing feature of Web 3.0 is a built-in mechanism that uses digital tokens to financially incentivise participants.
“We believe such tokens have the potential to extend into markets for both financial and real assets, including stock, bond and property markets as tokens become an accepted digital representation of private ownership and blockchain the arbiter.
“There are already tokenised forms of traditional liquid financial assets, such as bonds, equities and funds, known as ‘security tokens’. If enough consumers warm to their benefits, the real-to-digital transfer could occur rapidly and at scale, blurring the boundaries between the physical and the virtual.
“Offering a glimpse of what this future might look like is the “metaverse”. The market is expected to grow to around USD800 billion by the mid-2020s, with the adoption of Web 3.0 and related technologies accelerating the pace of its expansion.
“While these are all early steps, it is already a USD50 billion market and NFT sales are expected to grow more than 10 per cent every year through to 2030 which gives an idea of the potential this might have.”