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Which economic and investment trends will shape the decade?

by Yves Bonzon, Group Chief Investment Officer at Julius Baer

From the macroeconomy and capital markets to potential risk factors – each December we present the main forces that will shape the next decade. This year we have singled out fifteen trends. Continue reading to learn more about three of them.

Background: We are shifting from the neoliberal era to ’state-sponsored capitalism’

The neoliberal era, which started 40 years ago under the Reagan and Thatcher administrations, is definitely over. We are now on a fast track toward a system that can be best described as ‘state-sponsored capitalism’. This new paradigm is a direct response to colossal shifts that globalisation, liberalisation, extreme finacialisation and digitalisation brought upon western societies.

Historical secular trends

60/40 = 60% equities/40% bonds; quantamental = combination of quantitative and fundamental investing; MMT = Modern Monetary Theory; TechCare = combination of technology and healthcare, * projection

Source: Julius Baer

Trend 1: Rise of political triggers and decline of market signals
In the age of state-sponsored capitalism, endogenous market signals are blurred, as government interventions steer the cost of capital. We are in the process of losing free markets, as central banks extend their asset purchases further and further along the investment opportunity set. At the same time, political risk and policy uncertainty have drastically increased, gradually overshadowing traditional market signals and increasing market volatility and noise in the short term. This phenomenon has been reinforced by the increasing prominence of algorithmic and systematic trading.

In this environment, market timing – which was a poor risk/reward strategy anyway – is becoming even worse, as tactical moves become riskier and harder to implement profitably. As a result, the benefits of sticking to a robust strategic asset allocation that is tilted towards strong structural trends have increased. 

Trend 2: China rising to core asset class status
As China continues to decouple from the US and invest into its strategic shift from an export-driven industrial economy to one that is based on services and internal demand, its merits as a separate core asset class continue to grow. Unlike most emerging countries that have too much of one specific production factor, i.e. cheap labour, China has an increasingly well-educated population and fosters investments in research and development, and technology.

Furthermore, while a lack of support for investor property rights remains a risk and the renminbi still lacks convertibility, the Chinese government is set upon the gradual liberalisation and internationalisation of its currency. This is aided by the opening of China’s financial markets – already the second-largest in the world – to foreign investors. Moreover, in a world where all major developed-country central banks are engaging in financial repression, China’s policy mix remains surprisingly conventional, making the Chinese debt market highly attractive as investors continue to chase yield.

Trend 3: Life science disruptions
Healthcare areas that are related to digital health, genomics and extended longevity should see further upside potential over the longer term, given the political tailwinds, momentous demographic shifts around the world, the emergence of chronic diseases associated with ageing and ever-rising medical costs. The Covid-19 pandemic may very well be a watershed moment for the healthcare industry, as it has certainly laid bare the weakness of the entire health value chain, from citizens to international health institutions. 

In the genomic space, in particular, China is rapidly catching up with the US and Europe in terms of the number of scientific publications although the number of citations per publication and biotech-related patents remain lower.

What should investors do?
So how should investors position themselves against this backdrop?

  1. Be mindful of secular trends. Swim with the tide, not against it.
  2. Spend time in the market. 100% of performance is crystallised 20% of the time. However, you have to spend 100% of the time in the market if you want to capture these 20%.
  3. Credit risk premia remain attractive. For those who are invested in fixed income: be patient, diversify your credit risk and harvest that return.


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