These trends will shape the economy and markets in 2022 and beyond
Julius Baer’s group chief investment officer pinpoints where investors should focus their attention when considering their portfolios
What are the trends that will shape the economy and markets this decade? This question is of the utmost importance because long-term investors cannot afford to swim against the tide.
To answer it, the experts at Swiss wealth manager Julius Baer gather annually to update the company’s long-term economic, financial and social forecast. This Secular Outlook pinpoints where investors should focus their attention when considering their portfolios.
To find out more about the major trends that emerged from Julius Baer's Secular Outlook for 2022, we sat down with the group's chief investment officer, Yves Bonzon.
How did 2021 shape the evolution of secular trends for this decade?
With the identification of structural forces, as well as their disentanglement from cyclical ones, 2021 proved to be an even more challenging year than usual.
We are at an important inflection point. Not only are we at the beginning of a decade, a time when new trends are still hidden and simmering under the surface, but we are also at the tail end of four decades of disinflation.
Society in advanced economies is transitioning from neoliberal orthodoxy to an era of “state-sponsored capitalism”. The former is characterised by fiscal prudence and monetary policy dominance, while the latter will seek to use the full combined force of both monetary and fiscal levers to reduce the growth-debilitating inequalities that have emerged as a direct result of neoliberal policies.
The end game is reflation — and no, we are not there yet, despite what the current inflationary episode, on its surface, might suggest.
The extraordinary nature of the Covid-19 recession and pandemic-induced policy response has affected supply and demand in a way that makes it difficult to separate temporary from more persistent inflationary forces.
Chinese markets were challenging last year. However, the country’s rise to core asset class status remains a part of the trends you defined in your secular outlook for 2022. Why is that?
2021 was a momentous year for our strategic call on China.
Back in 2017, we introduced the theme of Chinese assets ascending to a stand-alone core asset class and assigned a 5% strategic allocation to Chinese equities, which constituted the entirety of our strategic allocation to emerging equities.
The thought process behind the decision was clear: if the two major sources of global growth were technology and emerging markets, China was the only place where the two growth engines converged.
However, with the developments in late 2020 — starting with the government pullback of the initial public offering (IPO) of the country’s largest fintech company — there was no doubt that China will not let capital grow exponentially within its borders. The country’s tightening regulatory fist means that the value, not just the valuation, of Chinese equity markets has been impaired.
Does that mean that our strategic case for the asset class is dead? I don’t think so. I believe the Chinese 60/40 portfolio will still be a strong contender during this decade — with emphasis on the 40.
Moreover, the diversification benefits that both Chinese equities and bonds bring remain strong in a world that is becoming bipolar.
If you had to pick one trend that has made it into your Secular Outlook in a big way, what would it be?
A major trend that has become more salient, and which we have included for the first time in this year’s secular outlook, is blockchain technology and the rise of crypto assets. Digital assets and the decentralised systems they are built on will be the foundations for the next digital and internet revolution.
The blockchain revolution will have deep consequences and it is likely to not only disrupt financial services, but also propagate across all sectors of the economy as businesses rely more and more on technology.
One of the prospects of digital asset disruption that stands out is the digitalisation of trust, ensured by the encrypted, non-corruptible nature of the blockchain.
The blockchain revolution will have deep consequences; it is likely to disrupt all sectors of the economy as businesses rely more and more on technologyYves Bonzon, Julius Baer’s group chief investment officer
We are entering a new era of “Web 3.0”, the third internet revolution, where we will see the emergence of the decentralised internet thanks to blockchain technology.
One of the most fascinating aspects of Web 3.0 is that it may displace the winners of the last decade — social media and web platforms — which we have come to know as the tech giants.
Moreover, blockchain could help solve the data-privacy issues created by social media platforms by giving ownership back to the data subject.
The path to Web 3.0 will not be a smooth one, however, and it is likely that we will see many players in the space disappear before true leadership emerges.
Speaking of digitalisation, do you believe that the acceleration of [digital] healthcare trends will continue?
The outbreak of the Covid-19 pandemic has shown the weakness of the entire healthcare value chain, from citizens to international health institutions. However, the pandemic is not the main driver behind improvements in the healthcare system; it has merely acted as the accelerator of a development that’s been in progress for some time.
Momentous demographic shifts around the world, the emergence of chronic diseases associated with ageing, and ever-growing medical costs are strong tailwinds that are likely to create further upside potential for areas related to digital health, genomics and extended longevity in the long term.
The greater adoption of digital-health technologies and other innovative solutions such as gene-based therapies could strengthen our resilience for present as well as future health threats and ease the pressure on current healthcare systems.
China is likely to continue to catch up with Western nations in healthcare innovation, especially under the notion of “common prosperity”, in which affordable access to high-quality health care is seen as a top priority.
The key aspect of such disruptions in the life-science space is the more general proliferation of data.
Going beyond digital health care, life sciences will become more and more similar to information technology as molecules and compounds are created artificially and personalised using artificial intelligence, robotics and nano-technology.
This trend is part of the “everything tech” theme that we are seeing emerge as every industry, from manufacturing to energy, is moving to become a technology business.
Energy transition has emerged as a key point of discussion over the past few years, especially as sustainability becomes a priority for many economies. Where are we heading?
The world has embarked on a major shift towards net-zero carbon emissions. The energy transition needed to achieve this is in full swing, and the “electrification of everything” — where new technologies are satisfying our growing energy needs and reducing our dependency on fossil fuels — has started.
Decreasing investments into fossil fuels, coupled with economic reopening effects as well as some ill-timed political decisions, have led to supply-chain disruptions, energy shortages and soaring prices. This shows that the world is struggling to shift to renewables at this fast pace and that the swift energy transition can act as an inflationary force in the short term.
In the long term, we believe that technological advancements in this space will increase productivity enough to act as a disinflationary force.
The adoption of clean energy sources in society is well under way. While it is clear that the transition away from fossil fuels towards cleaner energy sources will take more time and require great effort from both governments and corporations, we believe that it is an inevitable development that will be successfully implemented in the long run, despite some noise and market disturbances in the short run.
Finally, the topic of the decade: environmental, social and governance (ESG). With governments now making pledges to achieve a certain target within a certain period, how achievable do you think this is?
ESG criteria have been the buzzwords of the past few years and will continue to be one of the most important trends to follow this decade.
The UN Climate Change Conference (COP26), which was held in Glasgow in November 2021, has underlined the important role that the corporate sector in general, and the financial sector specifically, play in decreasing the world’s environmental footprint.
The growing environmental and social tensions mean that corporations need to redefine their purpose and should take into account not just shareholder value but also their impact on all stakeholders including workers, suppliers, communities and society at large.
While it is clear that finance will play an important part in a sustainable future, one has to be mindful that finance is not the ultimate solution and cannot do it alone. Governments, corporations and individuals have to work together towards this common goal and take responsibility for driving this much-needed transition.
The notion that incorporating ESG criteria into the investment process makes investments less profitable is also disappearing, which supports the move towards an environmentally friendly stakeholder economy.
However, incorporating ESG criteria into the investment process cannot follow a “one-size-fits-all” approach, but rather must be subject to the personal preferences of the individual investor through personalised portfolios.
This article was paid for by Julius Baer. The Swiss wealth manager’s Joburg representative office is based at Nelson Mandela Square in Sandton. Call +27 (0) 10-133-0403 or visit juliusbaer.com