Horizon 2023

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.