Pictet Group
A changed landscape
In the space of no more than three years, we have gone through a series of unprecedented changes that will shape economies and financial markets for a long time to come.
In early 2020, the authorities in major economies pushed through massive fiscal and monetary support to counter the huge upheaval caused by the covid pandemic. After re-opening caused a huge surge in demand (helped by these same massive support packages), central bankers belatedly realised that the economic environment prevailing before the pandemic no longer existed and that inflation was again becoming a major issue. Because the central banks in the US and Europe started late, we have seen since last year the steepest and most rapid tightening of interest rates in history.
On the political side, the Russian invasion of Ukraine in 2022 has modified the geopolitical equilibrium and brought forward the realignment of countries around different visions of the world. Both the pandemic and the war in Ukraine have placed a question mark over the supplies of commodities and products that we previously took for granted. In short, the economic and political framework of the past 10 years is gone. As we look ahead, this implies that any asset allocation based on this framework is doomed to perform badly. Since we do not expect a return to pre-2020 conditions, investors will have to adapt and redefine their allocations.
We see four main factors defining the way forward: households’ excess savings; governments’ large fiscal deficits; the size of central banks’ balance sheets; and disturbing geopolitical tensions.
Our expectation is that high household savings will combine with strong growth in wages (due to labour shortages) to sustain household spending and thereby make it hard to bring inflation back down to its previous level. At the same time, we expect the dire state of public finances to encourage governments to seek new sources of revenues, especially as central banks move to shrink their balance sheets by selling their government bond holdings or letting them mature without reinvesting. Lastly, geopolitical tensions are creating a less integrated world, forcing corporations to rethink and reshape intricate supply and production networks.
Fraught international relations mean that control over the means of production and security of supply have become top priorities for corporate executives, as well as for governments that can no longer rely on former allies. For many observers, recent developments look like a return to a Cold War mentality. But whereas the Cold War involved tensions between blocs centred around two global superpowers – the us and the Soviet Union – today is more complicated, with rivalry between a variety of economic and political blocs in a more multipolar world.
The top priorities today for governments are promoting industrial resilience and energy independence, and building defence capabilities and key new infrastructure. Countries currently lacking in these areas will need to adapt rapidly, implying many years of strong public investment.
Against this backdrop, fiscal incentives are increasingly being used as part of a strategic goal to keep key companies and industries closer to home. Competition between countries to secure and control access to cutting-edge technologies is only likely to increase in the years ahead. From an investment point of view, countries that try to regain industrial prowess when there is already tension in the labour market could increase inflationary pressure unless technology (including artificial intelligence) triggers large productivity gains. For corporations, the costs associated with the reshaping of supply and production networks imply lower profitability and the redirection of cash flows towards new capital expenditure –probably at the expense of equity holders who in previous years were beneficiaries of companies’ profitability through share buybacks and dividends. As well as capital spending, how to attract a dwindling pool of workers could be higher on corporates’ agendas than rewarding shareholders.
The fast rise in interest rates since 2022 will also impact equity investing. This is because the discount rate (the rate central banks charge commercial banks for short-term loans) impacts the present value of any future cashflow. The rise in the discount rate means structurally lower equity valuations going forward. In some countries, the rise in short-term rates since 2022 means that cash instruments look like credible investments again. Meanwhile, a more fragmented geopolitical scene could lead to a reshaping of the monetary order, with the us dollar’s supremacy increasingly being challenged. Investors may see further changes on this front in the coming decade as countries question the us currency’s dominant role in trade and forex reserves.
While equity investing will be challenged by this new environment, the picture is also changing for fixed-income investments. Faced with ever lower nominal yields, investors have in recent years increasingly pushed into riskier fixed-income assets to find attractive yields. But now, the rise in inflation and the resultant rate hikes have made high-quality fixed income attractive again. With inflation and interest rates set to stay higher than in the past, quality investment-grade corporate and government bonds should account for a structurally larger part of both asset allocations and returns without increasing portfolios’ risk parameters. Promising once again decent returns and a degree of portfolio protection, the return of fixed income should be good news for typical 60/40 allocations.
To conclude, the trends identified in last year’s edition of Horizon have accelerated even more, leading to a very different investment landscape that calls for a changed approach to asset allocation. It is only by looking at the long-term changes that we outline and understanding their implications that investors will able to make the best of our forecasts for asset-class returns over the coming 10 years.
Legal information and disclaimers
Distributors: Banque Pictet & Cie SA, Route des Acacias 60, 1211 Geneva 73, Switzerland and Bank Pictet & Cie(Europe) AG, Neue Mainzer Str. 1 60311 Frankfurt am Main Germany.Banque Pictet & Cie SA is established inSwitzerland, exclusively licensed under Swiss Law and therefore subject to the supervision of the Swiss Financial MarketSupervisory Authority (FINMA).Bank Pictet & Cie (Europe) AG is established in Germany, authorised and regulated by the Bundesanstalt fürFinanzdienstleistungsaufsicht, the German Federal Financial Supervisory Authority (Bafin). This marketing communication is not intended for persons who are citizens of, domiciled or resident in, or entitiesregistered in a country or a jurisdiction in which its distribution, publication, provision or use would violate current lawsand regulations. The information, data and analysis furnished in this document are disclosed for information purposesonly. They do not amount to any type of recommendation, either general or tailored to the personal circumstances of anyperson. Unless specifically stated otherwise, all price information is indicative only. No entity of the Pictet Group may beheld liable for them, nor do they constitute an offer or an invitation to buy, sell or subscribe to securities or other financialinstruments. The information contained herein is the result neither of financial analysis within the meaning of the SwissBankers Association’s Directives on the Independence of Financial Research, nor of investment research for thepurposes of the relevant EU MiFID provisions. All information and opinions expressed in this document were obtainedfrom sources believed to be reliable and in good faith, but no representation or warranty, express or implied, is made asto its accuracy or completeness. Except for any obligations that any entity of the Pictet Group might have towards theaddressee, the addressee should consider the suitability of the transaction to individual objectives and independentlyassess, with a professional advisor, the specific financial risks as well as legal, regulatory, credit, tax and accountingconsequences. Furthermore, the information, opinions and estimates in this document reflect an evaluation as of the dateof initial publication and may be changed without notice. The Pictet Group is not under any obligation to update or keepcurrent the information contained herein. In case this document refers to the value and income of one or more securitiesor financial instruments, it is based on rates from the customary sources of financial information that may fluctuate. Themarket value of financial instruments may vary on the basis of economic, financial or political changes, currencyfluctuations, the remaining term, market conditions, the volatility and solvency of the issuer or the benchmark issuer.Some investments may not be readily realizable since the market in the securities can be illiquid. Moreover, exchangerates may have a positive or negative effect on the value, the price or the income of the securities or the relatedinvestments mentioned in this document. When investing in emerging countries, please note that the political andeconomic situation in those countries is significantly less stable than in industrialized countries. They are much moreexposed to the risks of rapid political change and economic setbacks. Past performance must not be considered anindicator or guarantee of future performance, and the addressees of this document are fully responsible for anyinvestments they make. No express or implied warranty is given as to future performance. Moreover, forecasts are not areliable indicator of future performance. The content of this document can only be read and/or used by its addressee. ThePictet Group is not liable for the use, transmission or exploitation of the content of this document. Therefore, any form ofreproduction, copying, disclosure, modification and/or publication of the content is under the sole liability of the addresseeof this document, and no liability whatsoever will be incurred by the Pictet Group. The addressee of this document agreesto comply with the applicable laws and regulations in the jurisdictions where they use the information reproduced in thisdocument. This marketing publication is issued by Banque Pictet & Cie SA. This marketing publication and its contentmay be cited provided that the source is indicated. All rights reserved. Copyright 2023. Distributors: Banque Pictet & Cie SA, Route des Acacias 60, 1211 Geneva 73, Switzerland and Pictet & Cie (Europe) SA, 15A, avenue J. F. Kennedy, L-1855 Luxembourg/B.P. 687 L-2016 Luxembourg.Banque Pictet & Cie SA is established in Switzerland, exclusively licensed under Swiss Law and therefore subject to the supervision of the Swiss Financial Market Supervisory Authority (FINMA).Pictet & Cie (Europe) SA is established in Luxembourg, authorised and regulated by the Luxembourg Financial Authority, Commission de Surveillance du Secteur Financier.This marketing communication is not intended for persons who are citizens of, domiciled or resident in, or entities registered in a country or a jurisdiction in which its distribution, publication, provision or use would violate current laws and regulations.The information, data and analysis furnished in this marketing communication are disclosed for information purposes only. They do not amount to any type of recommendation, either general or tailored to the personal circumstances of any person. Unless specifically stated otherwise, all price information is indicative only. No entity of the Pictet Group may be held liable for them, nor do they constitute an offer or an invitation to buy, sell or subscribe to securities or other financial instruments. The information contained herein is the result neither of financial analysis within the meaning of the Swiss Bankers Association’s Directives on the Independence of Financial Research, nor of investment research for the purposes of the relevant EU MiFID provisions. All information and opinions expressed in this marketing communication were obtained from sources believed to be reliable and in good faith, but no representation or warranty, express or implied, is made as to its accuracy or completeness.Except for any obligations that any entity of the Pictet Group might have towards the addressee, the addressee should consider the suitability of the transaction to individual objectives and independently assess, with a professional advisor, the specific financial risks as well as legal, regulatory, credit, tax and accounting consequences.Furthermore, the information, opinions and estimates in this marketing communication reflect an evaluation as of the date of initial publication and may be changed without notice. The Pictet Group is not under any obligation to update or keep current the information contained herein. In case this marketing communication refers to the value and income of one or more securities or financial instruments, it is based on rates from the customary sources of financial information that may fluctuate. The market value of financial instruments may vary on the basis of economic, financial or political changes, currency fluctuations, the remaining term, market conditions, the volatility and solvency of the issuer or the benchmark issuer. Some investments may not be readily realisable since the market in the securities can be illiquid. Moreover, exchange rates may have a positive or negative effect on the value, the price or the income of the securities or the related investments mentioned in this marketing communication. When investing in emerging countries, please note that the political and economic situation in those countries is significantly less stable than in industrialised countries. They are much more exposed to the risks of rapid political change and economic setbacks.Past performance must not be considered an indicator or guarantee of future performance, and the addressees of this marketing communication are fully responsible for any investments they make. No express or implied warranty is given as to future performance. Moreover, forecasts are not a reliable indicator of future performance. The content of this marketing communication can only be read and/or used by its addressee. The Pictet Group is not liable for the use, transmission or exploitation of the content of this marketing communication. Therefore, any form of reproduction, copying, disclosure, modification and/or publication of the content is under the sole liability of the addressee of this marketing communication, and no liability whatsoever will be incurred by the Pictet Group. The addressee of this marketing communication agrees to comply with the applicable laws and regulations in the jurisdictions where they use the information reproduced in this marketing communication.This marketing communication is issued by Banque Pictet & Cie SA. This publication and its content may be cited provided that the source is indicated. All rights reserved. Copyright 2020.Distributors: Bank Pictet & Cie (Asia) Ltd (“BPCAL”) in Singapore, 10 Marina Blvd #22-01 Tower 2, Marina Bay Financial Centre, Singapore 018983 and Pictet & Cie (Europe) S.A., Hong Kong branch (“Pictet HK branch”) in Hong Kong. The registered address of Pictet HK branch is 9/F, Chater House, 8 Connaught Road Central, Hong Kong.The information, tools and material presented in this marketing communication are provided for information purposes only and are not to be used or considered as an offer, an invitation to offer or solicitation to buy, sell or subscribe for any securities, commodities, derivatives, (in respect of Singapore only) futures, or other financial instruments (collectively referred to as “Investments”) or to enter into any legal relations, nor as advice or recommendation with respect to any Investments. This marketing communication is intended for general circulation and it is not directed at any particular person. This marketing communication does not have regard to the specific investment objectives, financial situation and/or the particular needs of any recipient of this marketing communication. Investors should seek independent financial advice regarding the appropriateness of investing in any Investments or adopting any strategies discussed in this marketing communication, taking into account the specific investment objectives, financial situation or particular needs of the investor, before making a commitment to invest.BPCAL/Pictet HK branch has not taken any steps to ensure that the Investments referred to in this marketing communication are suitable for any particular investor, and accepts no fiduciary duties to any investor in this regard. Furthermore, BPCAL/Pictet HK branch makes no representations and gives no advice concerning the appropriate accounting treatment or possible tax consequences of any Investment. Any investor interested in buying or making any Investment should conduct its own investigation and analysis of the Investment and consult with its own professional adviser(s) as to any Investment including the risks involved with transactions on such Investment.This marketing communication is not to be relied upon in substitution for the exercise of independent judgment. The value and income of any Investment mentioned in this marketing communication may fall as well rise. The market value may be affected by, amongst other things, changes in economic, financial, political factors, time to maturity, market conditions and volatility, and the credit quality of any issuer or reference issuer. Furthermore, foreign currency rates of exchange may have a positive or adverse effect on the value, price or income of any Investment mentioned in this marketing communication. Accordingly, investors must be willing and able to, and effectively assume all risks and may receive back less than originally invested.Past performance should not be taken as an indication or guarantee of future performance and no representation or warranty, expressed or implied, is made by BPCAL/Pictet HK branch regarding future performance.This marketing communication does not constitute the investment policy of BPCAL/Pictet HK branch, or an investment recommendation, and merely contains the different assumptions, views and analytical methods of the analysts who prepared them. Furthermore, the information, opinions and estimates expressed herein reflect a judgment at its original date of publication and are subject to change without notice and without any obligation on BPCAL/ Pictet HK branch to update any of them. BPCAL/Pictet HK branch may have issued or distributed other reports or marketing communications that are inconsistent with, and reach different conclusions from, the information presented in this marketing communication.While the information and opinions presented herein are believed to be from sources believed to be reliable, BPCAL/Pictet HK branch is not able to, and do not make any representation or warranty as to its accuracy or completeness. Accordingly, BPCAL/Pictet HK branch accepts no liability for loss arising from the use of or reliance on this marketing communication presented for information purposes only. BPCAL/ Pictet HK branch reserves the right to act upon or use any of the information in this marketing communication at any time, including before its publication herein.BPCAL/Pictet HK branch and its affiliates (or employees thereof) may or may not have long or short positions in, and buy or sell, or otherwise have interest in, any of the Investments mentioned herein, and may or may not have relationships with the issuers of or entities connected with Investments mentioned in this marketing communication. BPCAL/Pictet HK branch and their affiliates (or employees thereof) may act inconsistently with the information and/or opinions presented in this marketing communication.The information used to prepare this marketing communication and/or any part of such information, may have been provided or circulated to employees and/or one or more clients of BPCAL/Pictet HK branch before this marketing communication was received by you and such information may have been acted upon by such recipients or by BPCAL/Pictet HK branch.This marketing communication is provided solely for the information of the intended recipient only and should not be reproduced, published, circulated or disclosed in whole or in part to any other person without the prior written consent of BPCAL/Pictet HK branch.SingaporeThis marketing communication is not directed to, or intended for distribution, publication to or use by, persons who are not accredited investors, expert investors or institutional investors as defined in section 4A of the Securities and Futures Act (Cap. 289 of Singapore) (“SFA”) or any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or would subject BPCAL and any of its affiliates or related corporations to any prospectus or registration requirements.BPCAL has obtained an exemption from the Monetary Authority of Singapore (“MAS”) under section 100(2) of the Financial Advisers Act (“FAA”) for the provision of financial advisory services to High Net Worth Individuals (as defined in the MAS Guidelines on Exemption for Specialised Units Serving High Net Worth Individuals FAA-G07) (the “Exemption”) and is exempted from the requirements of sections 25, 27, 28 and 36 of the FAA, the MAS Notice on Recommendations on Investment Products (FAA-N16), MAS Notice on Appointment and Use of Introducers by Financial Advisers (FAA-N02), MAS Notice on Information to Clients and Product Information Disclosure (FAA-N03) and MAS Notice on Minimum Entry and Examination Requirements for Representatives of Licensed Financial Advisers and Exempt Financial Advisers (FAA-N13). Please contact BPCAL in Singapore in respect of any matters arising from, or in connection with this marketing communication.Hong KongThis marketing communication is not directed to, or intended for distribution, publication to or use by, persons who are not “professional investors” within the meaning of the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) and any rules made thereunder (the “SFO”) or any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or would subject Pictet HK branch and any of its affiliates or related corporations to any prospectus or registration requirements.Pictet & Cie (Europe) S.A. is incorporated in Luxembourg with limited liability. It is an authorised institution within the meaning of the Banking Ordinance and a registered institution (CE No.: AQ515) under the SFO carrying on Type 1 (dealing in securities), Type 4 (advising on securities) and Type 9 (asset management) regulated activities.Warning: The contents of this marketing communication have not been reviewed by any regulatory authority in Hong Kong. You are advised to exercise caution in relation to the offer. If you are in any doubt about any of the contents of this marketing communication, you should obtain independent professional advice. Please contact Pictet HK branch in Hong Kong in respect of any matters arising from, or in connection with this marketing communication.Distributor: Pictet Bank & Trust Limited, where registered office is located at Building 1, Bayside Executive Park, West Bay Street & Blake Road, Nassau, New Providence, The Bahamas.The marketing communication is not directed to, or intended for distribution or publication to or use by persons who are not Accredited Investors (as defined in the Securities Industry Regulations, 2012) and subject to the conditions set forth in the Securities Industry Regulations, 2012 or to any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or would subject Pictet Bank & Trust Limited to any prospectus or registration requirements. Pictet Bank & Trust Limited is incorporated in The Bahamas with limited liability. It is a bank and trust company that is licensed in accordance with the Banks and Trust Companies’ Regulation Act and is regulated by the Central Bank of The Bahamas. Additionally, Pictet Bank & Trust Limited is registered with the Securities Commission of The Bahamas as a Broker Dealer II and is approved to (i) Deal in Securities 1. (a) & (c ); (ii) Arrange Deals in securities; (iii) Manage Securities ; (iv) Advise on Securities.Warning: The content of this marketing communication has not been reviewed by any regulatory authority in The Bahamas. You are, therefore, advised to exercise caution when processing the information contained herein. If you are in any doubt about any of the content of this marketing communication, you should obtain independent professional advice.