How much has changed for long-term investors with Donald Trump’s re-election as US president. His administration is remaking the global trading system and unmaking post-war international relations. To what degree do these and other disruptive changes affect economic growth and inflation – and thus asset performance – in the medium run?
For all the volatility and disruption that the new administration has unleashed, we believe the factors driving long-run economic growth and inflation (demographics, productivity) still prevail. As for our model, it still assumes the same long run (i.e., steady-state) growth and inflation rates as we did in previous iterations of this annual publication.
- Our base case is that the economic environment will ‘normalise’ over the coming years and revert to a situation of under-consumption and under-investment, pushing inflation back to central bank target levels (in the US and UK) or lower (in Japan and the eurozone). Demographic headwinds will likely make meeting inflation targets an uphill battle for all central banks.
- Our expectations for risk-adjusted returns for a euro-based investor over the next 10 years are modest. We foresee a Sharpe ratio greater than 0.5 for few of the major asset classes.
- Within core assets, we are more positive on corporate bonds and rates than equity; within government bonds, we are more positive on nominal bonds than inflation-linked bonds.
- We are most negative about the risk-adjusted return of US equity. Based on our valuation metric, US equities are still expensive.
In our 2025 edition, we present our expectations for returns over five, 10- and 20-year investment horizons to facilitate the asset allocation of clients.
