Pictet predicts a ‘disruption’ in asset allocation over the next five years

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As growth in developed markets stagnates, Luca Paolini, chief strategist at Pictet Asset Management, said the next five years will disrupt existing approaches to asset allocation.

According to Paolini, the global economy is approaching the end of its expansion phase, tighter financial conditions, a spike in US job growth and wider output gaps all point to a recession in the coming months. years.

However, while in this environment Pictet expects equity market returns to decline, Paolini said his research shows that double-digit opportunities are achievable in emerging markets and other high-risk assets in the global market. spectrum of alternatives.

“Beyond commodities, we see value in gold, infrastructure, real estate and private equity, which will require charting a new course for investors in terms of asset allocation” , did he declare.

“Emerging market equities – Chinese equities in particular – look attractive, while the potential for emerging market bond earnings growth is bolstered by what we believe is a steady appreciation in developing country currencies.”

Goods

As investors increasingly seek returns above inflation, Paolini said that over the next five years, commodities outside the energy complex could prove fruitful.

“Our analysis shows that real estate and private equity are each expected to outperform developed market equities over our five-year forecast horizon, which would boost a portfolio’s return, while gold and infrastructure would help diversify its sources of risk,” he said.

As for the outlook for developed markets, Paolini said they will face squeezed corporate profit margins going forward.

“With rising wages and commodity prices, tighter regulations that increase the costs of doing business, and the prospect of higher corporate taxes, we expect margins to decline on all major markets,” he said.

“Outside the United States, developed market fixed income yields will fall below inflation over the next five years.”

Short-lived inflation

As inflation continues to hit new highs, Paolini said Pictet is confident the surge seen this year will prove short-lived overall.

However, he added that higher earnings volatility will persist between 2% and 3% across much of the developed world.

“As the supply bottlenecks caused by Covid begin to unblock and the impact on commodity prices from Russia’s invasion of Ukraine begins to fade, price pressures will dissipate,” he said.




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