Investors need to plot a new course in terms of asset allocation over the coming years in line with the expected shift in global market and return drivers.
Based on research by Pictet AM, double-digit opportunities can be found across emerging markets (EM) and other high-risk assets in the alternatives spectrum.
In addition to commodities, the 10th edition of the fund house’s five-year outlook sees value in gold, infrastructure, real estate and private equity.
“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 AM.
More targeted on equities
With the end of the global economy’s expansionary phase in sight, coupled with tighter financial conditions, a peak in US jobs growth and larger output gaps, such recessionary indicators suggest that returns from equity markets in general will fall, believes Pictet AM.
However, EM stocks – and Chinese equities in particular – look attractive. “We expect Europe and China to be the best-performing equity markets over the next five years, with each forecast to deliver an average annual return of around 12% in dollar terms,” explained Paolini.
“We think the valuation discount will begin to shrink as Europe and China’s economy growth differentials with the US will shift in their favour,” he added.
Pictet AM also believes that health, automation and clean energy are three investment themes likely to gather the most strength in the coming years, offering a source of excess return.
Finding relative value in bonds
For fixed income, meanwhile, while Pictet AM forecasts the inflationary surge in 2022 to be relatively short lived, higher volatility of outcomes will persist.
These will range between 2% and 3% across much of the developed world.
Outside of the US, returns from developed market fixed income will fall below inflation over the next five years, added the firm.
“We continue to believe that China’s government bonds offer among the best return potential relative to risk, as well as a valuable element of diversification in global multi-asset portfolios,” said Paolini.
Alternatives become mainstream
Investors should look to commodities outside of the energy complex to deliver returns well in excess of inflation over the next five years.
Analysis by Pictet AM shows real estate and private equity should each outperform developed market equities over a five-year forecast horizon, with gold and infrastructure help diversify its sources of risk.
Elsewhere in the alternatives landscape, disruption across the internet and digital economy will make an impact, with the next generation of the world wide web 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,” explained Arun Sai, senior multi-asset strategist at Pictet AM.
“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.”
The metaverse offers a glimpse of what this future might look like. Pictet AM believes this market can grow to around US$800bn by the mid-2020s, with the adoption of Web 3.0 and related technologies accelerating the pace of its expansion.
