As developed market growth stalls, Luca Paolini, chief strategist at Pictet Asset Management, said the next five years is going to present a “shake up” to existing approaches to asset allocation.
According to Paolini, the global economy approaching the end of its expansionary phase, tighter financial conditions, a peak in US jobs growth and larger output gaps all point to a recession within the next years.
However, while in this environment Pictet expects returns from equity markets to fall, Paolini said its 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,” he said.
“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.”
With investors increasingly hunting for inflation-beating returns, Paolini said over the next five years commodities outside of the energy complex could prove fruitful.
“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,” he said.
Looking at the prospects for developed markets, Paolini said they face a squeeze on corporate profit margins going forward.
“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,” he said.
“Outside of the US, returns from developed market fixed income will fall below inflation over the next five years.”
While inflation continues to hit new highs, Paolini said it is the belief of Pictet that the surge seen this year will broadly prove to be relatively short-lived.
However, he added that higher volatility of outcomes will persist ranging between 2% and 3% 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,” he said.