Horizon 2020: long-term investing in a world marked by pandemic

The sudden, violent recession triggered by this year’s covid-19 outbreak provides further impetus to pre-existing economic and market dynamics. The actions of central banks are perhaps the most emblematic in this regard, with previously shunned stimulating measures such as Modern Monetary Theory and yield curve control rapidly gaining traction. In all, the growth in private and public indebtedness since the financial crisis, accelerated by the pandemic, means central banks are shifting to what we call a ‘debt dominance’ monetary policy regime that aims to durably suppress rates.

Central banks will be helped in this regard by the possibility that inflation remains low—although one cannot exclude the risk that the massive pandemic-related liquidity injections of 2020 foster a ‘regime shift’ toward higher levels of global inflation, possibly triggered by currency depreciation and debasement.

The consequences of covid-19 for asset-class returns vary. First, using this year as a starting point, the pandemic means an improvement in return expectations for private assets and, paradoxically, for equities. With earnings declining in 2020, the 10-year return expectations for equities have risen. In addition, the persistence of low bond yields will likely prolong the appeal of equities, with US equities forecast to deliver an average annual return of 6.5% over the period. Low rates and improving valuations also mean that average annual returns for private equity could reach over 10% (in US dollars).

Pictet Wealth Management’s analysis was already showing that returns for core sovereign bonds would be significantly lower than in the past, but the suppression of interest rates hastens the trend (we expect average annual nominal returns of 0.3% for US 10-year Treasuries over the next 10 years versus 9% for the best part of four decades). Ten-year Swiss, Japanese and German bonds look particularly unattractive, with negative expected annual returns.

Having provided only very modest post -inflation returns over the past 30 years, we forecast that the regime shift in monetary policy will also lead to negative average annual returns for cash in euro and Swiss francs over the next 10 years. Taking taxes into account, real returns from cash look even less appealing.

By contrast, gold should benefit from the policy shift (and possible shift in the inflation regime), with an expected average annual return of over 4% (in USD dollars).

For those willing to assume the risk, emerging-market debt and high-yield bonds offer good potential. The massive need for infrastructure investments worldwide points to private core infrastructure investments continuing to provide healthy, albeit lower average returns in the coming decade.

All in all, the turn in monetary policy also confirms that the endowment style of investing remains the most appropriate strategic asset allocation-style.

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