Asset allocation 'shake-up' to come in the next five years: Pictet

Developing markets and high-risk assets in the alternative asset spectrum set for double-digit returns, says firm

Asset allocation 'shake-up' to come in the next five years: Pictet

Pictet Asset Management's chief strategist, Luca Paolini, predicts a "shake up" in asset allocation strategies over the next five years as developed-market growth slows.

The global economy is nearing the end of its expansionary phase, according to Paolini, and tighter financial conditions, a peak in US job growth, and greater production gaps all point to a recession in the coming years.

While Pictet expects equities market returns to fall in this climate, Paolini claims that its research suggests that double-digit returns are possible across emerging markets and other high-risk assets in the alternative 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 in the latest edition of the firm’s secular outlook.

“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 seeking inflation-beating returns, Paolini believes commodities outside the energy complex could be profitable over the next five years.

“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 ahead, Paolini predicts that corporate profit margins would be squeezed in developed nations.

“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.

As inflation keeps rising to new highs, Pictet believes the current surge will be rather short-lived.

However, Paolini noted that in much of the industrialized world, higher levels of outcome volatility will endure, ranging between 2% and 3%.

“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.