The latest issue of Perspectives is a special edition devoted to Pictet Wealth Management’s (PWM) analysis of expected returns across 35 asset classes over a 10-year investment horizon, as well as the secular economic and market trends that will underpin those returns. This special edition resumes the more detailed analysis contained in our annual publication, Horizon.
Simply put, PWM expects the major asset classes to deliver lower annual returns on average than in the past amid shifts in market and economic regimes and a wave of disruptive innovation. Cash and government bonds could offer poor returns and even equities could prove a less profitable investment than they have been. But alternatives such as private equity and private equity real estate offer greater potential—in exchange for a degree of illiquidity. In the words of Christophe Donay, PWM’s Head of Asset Allocation & Macro Research, “basically, to optimise returns in the years ahead investors will have to be open to investing in more illiquid asset classes”. And in the same vein, Donay believes that “our expectation that a traditional, historically effective 60% equities / 40% bonds portfolio will produce much lower returns over the next 10 years also means that wealth managers will need to adapt their style of strategic asset allocation.”
Elsewhere in this issue, we look at the impact of trade tensions on markets, particularly on industrial sector equities and the corporate credit universe. Senior investment manager Fernand Pacicca points out that any escalation of tensions between the US and China “only raises the probability of a slowdown in an economic cycle that is already well advanced. Investors’ nervousness is already palpable in the way that share prices have been reacting to any downward revision of companies’ earnings outlook.”
And yet Cesar Perez remains cautiously optimistic about equities’ prospects overall. PWM’s head of investments and CIO admits that the high level that corporate margins have reached “in itself may be a reason for market participants to worry”. Wage pressures could normally be expected to rise, and rising oil prices are already eating into margins. But even if margins are squeezed, Perez argues, “companies’ revenues can continue to grow if the economic cycle still has legs—which we think it has”. In short, barring a trade war, Perez expects relatively benign economic conditions to last until 2019, “helping cushion corporations against margin pressures”.