Pictet Wealth Management has released the 2021 edition of Horizon, which contains its 10-year profitability forecasts as well as key economic, political and market trends.
For the first time, Horizon also analyzed theimpact of climate issues on economic and financial markets.
“Climate issues are becoming an essential issue: as governments and central banks take them into account in defining their policies, we expect repercussions at all levels, from asset class dynamics to asset allocation”, he explains Christophe Donay, Pictet Wealth Management’s Head of Strategy and Asset Allocation.
“In the current context of health crisis and persistent uncertainty about its long-term consequences, the main theme of the 2021 edition is growing importance of climate issues on economic and financial markets“.
The transition to low carbon economies it will play a leading role in economic and financial markets over the next decade.
Climate change could contribute to a moderate increase in inflation. Adapting economic policies to climate challenges could stimulate growth and productivity in countries, which will thus be able to control their production costs and prevent inflation peaks. Inflation expectations were therefore increased by 0.1% on average in China, the United States and Europe, as were the 10-year US Treasury bill rate forecasts, from 2.5% to 3.0%.
There first consequence is that holding cash will offer negative real returns. Cash in the US market is expected to generate an average nominal return of 1% over the next ten years, as well as a negative real return. Returns from government bonds are also scarce.
The key to success? For Pictet it means greater portfolio diversification. “Gold is the main beneficiary of our climate impact analysis,” notes Donay, “and is able to add 0.6% a year to its return expectations.” Over the next decade gold could yield on average 3% per annum but must give way to other alternative instruments such as venture capital and private equity.