瑞士百达集团
10 Essential Messages for the Year
Our top-down insights contribute to designing the strategic asset allocation best suited to achieving an investor’s long-term return targets.
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1 — The return of big government will weigh on long-term returns
Economic upheaval over the past four decades has generated a number of negative externalities, including inequalities of income and wealth as well as lack of fair access to quality healthcare and education. These externalities can be dealt with either through positive market incentives or state intervention. Powerful central state intervention is the hallmark of the Chinese economy, for example, while in the US has an approach to policy that relies heavily on market mechanisms. Continental Europe sits somewhere between the US and China, but in the coming years could lean towards increasing state intervention to the detriment of market mechanisms.
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2 — The Great Divergence will be a source of financial instability
Since 1980, real economic growth and debt have increasingly diverged. Whereas before 2008, the ratio of total (household, corporate and government) debt to GDP was 140%, it is now over 350%, according to Institute of International Finance figures. And this ratio is still rising, suggesting that it takes more and more debt to generate less and less real growth. This divergence is a source of financial instability because, in the absence of strong growth, inflation hurts the value of debt outstanding (through currency devaluation) or triggers a debt moratorium. Therefore, debt sustainability is a central issue for our long-term perspectives, with the Great Divergence requiring active management to ensure investors choose the most solvent economic actors during the asset allocation process.
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3 — Dusk is falling on the current innovation wave
This represents a profound structural change. We break technological innovation down into three successive waves. We believe that the second ‘wave’ of the technological revolution that commenced over 10 years ago is ebbing away, while the third one may be a couple of years off. While new technological and corporate leaders will gradually emerge during the transition, the impact of innovation on markets is likely to be less dramatic than before—at least until the third wave of innovation really hits. Over the past 10 years, the Nasdaq has outperformed the S&P 500 by 72 percentage points, an average of 6% per year. This outperformance is likely to stall in the next 10.
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4 — Inflation is shifting towards a structurally higher regime
After peaking at between 12% and 15% annualised in the early 1980s, the inflation rate in developed economies fell steadily to about 1% in some places 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 make a change in the inflationary regime over the next decade a distinct possibility with 3% expected inflation for the US. Five factors explain this regime change: demographic shifts; the fading of the current innovation wave’s disinflationary effects; changing economic models in emerging economies, mainly China; the trend towards deglobalisation under the aegis of increased state intervention; and, finally, the return of big government as the combat against negative externalities picks up.
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5 — Climate change and inflation will support economic growth
Just as the investments needed to deal with climate change should boost long-term growth (a theme discussed in the 2021 edition of Horizon), 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.
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6 — Investors need to pay closer attention to real returns
After many years of very low inflation rate 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 we publish each year.
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7 — Cash & sovereign bonds may deliver sharply negative real returns
In previous editions of Horizon we argued that ‘cash is no longer king’. Today, the return of inflation strengthens our argument that cash is a capital-erosion machine. The same message holds true for sovereign bonds. Although they retain their status as a usual 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. However, higher coupons will soften the blow.
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8 — Endowment-style asset allocations are well suited to higher inflation
There will be an increasing focus on asset allocations built around asset classes that actually protect capital in real terms. According to our research, real assets—a mainstay of endowment fund allocations—fit the bill. The prospect of higher structural inflation enhances the argument for the endowment-style approach to investing we have been advocating for several years. And an equal split in the allocation to bonds, equities and alternative assets could be tilted as the occasion demands to the detriment of the bond allocation and in favour of the alternative asset class, especially real assets such as private equity, real estate or real estate private equity.
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9 — Credit and inflation-linked bonds offer better prospects than sovereign bonds
This year, we have decided to include our long-term return expectations for private credit and inflation-linked bonds given the increasing role both can play in optimising the diversification of a strategic allocation. With higher inflation, their high real returns and their suitability to active management also warrant their inclusion in strategic allocations. Forming an integral part of any endowment approach to investing, private credit and inflation-linked bonds should improve the real returns of a strategic asset allocation.
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10 — Precisely defining investors’ objectives is key to proper asset allocation
The increasing sources of financial instability, the changing inflation regime, the need to up 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 we will find ourselves in the coming years.
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