

SECULAR OUTLOOK
Economic and investment trends

Marketing Material
Publication date: 8 December 2022, 8:00 CET
Please find important legal information at the end of this document.
Source: Bank Julius Baer & Co. Ltd. (Julius Baer), unless explicitly stated otherwise.
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Contents
4
The end of the peace dividend
6
Key secular trends
22
Key risk factors
23
Appendix

3
The end of the peace dividend

The end of the peace

dividend
Dear Reader, On (de)globalisation, for example, we have been
highlighting the strategic confrontation between
In the previous edition of our Secular Outlook the US and China for years. As the war in Ukraine
update, we highlighted that the world economy unfolded and it became clear that energy supply
and capital markets were at a historic inflection chains needed to be overhauled, at least in Europe,
point. One major consequence of the global pan- it seemed that a new iron curtain was about to fall,
demic has been the transition from a world led by separating those who side with one global super-
neoliberal principles, which is characterised by fis- power or the other. As we delved deeper into that
cal conservatism and falling inflation, to a world of question, we concluded that the world was most
state-sponsored capitalism, where expansive fis- probably not turning ‘bipolar’ but rather ‘multipo-
cal and monetary policies work together to reduce lar’. In the name of national interest, countries have
inequalities, ultimately reflating developed econ- a tendency to deviate from seemingly strong alli-
omies. 2022 has shown us just how violent and ances. Overall, historical precedence and real-world
volatile this kind of shift can be given the many cur- constraints speak against a widespread deglobalisa-
veballs it has thrown at us: a major war in Europe, a tion, and any reshoring efforts would likely be driven
global energy crisis, and record-breaking inflation by strategic national security reasons and the need
have been accompanied by a synchronised, bru- for increased resilience rather than a dogmatic dis-
tal monetary-policy tightening campaign by global mantling of established, efficient supply chains. That
central banks, which has led to the worst bond mar- said, geopolitical tensions will likely endure, and
ket sell-off in centuries and an equity bear market. going forward, as we have seen in the aftermath of
To add insult to injury, China has suffered a marked Russia’s invasion of Ukraine, trade as well as financial
slowdown, driven by its Covid-19 zero-tolerance pol- markets will be weaponised in geopolitical conflicts,
icies and continued issues related to its real estate in our view. This constitutes a continued challenge
sector. In such a restless environment, it is more to economies and markets – what we call the ‘end
challenging than ever to differentiate transitory from of the peace dividend’. For investors, this means an
structural trends. increased need to evaluate their geographical port-
folio allocation, not only based on economic funda-
mentals but also on geopolitical risk and confiscation
Many of the developments this year could indeed risk.
be interpreted as signs of new trends kicking in.
The geopolitical crisis has raised concerns about
further deglobalisation and the break-up of sup- What about the end of financial repression? We cer-
ply chains, possibly fuelling not only higher energy tainly did not expect the aggressive monetary-policy
prices for years to come but also a broad-based tightening campaign of the US Federal Reserve
commodity super cycle. Financial commentators (Fed) this year, just as we underestimated the per-
are not only proclaiming the end of the low-inflation sistence of the current inflation spike. Frankly, the
era but also the end of near-zero interest rates and rapid normalisation of short- and long-term rates
ultra-accommodative policies in general. However, surprised us more than anything. The question is
as extreme as these short-term developments are, whether this new high-rates world represents the
their usefulness for predicting long-term trends new normal. In our view, not quite. At the end of
remains limited, which is the key takeaway we would the day, we believe the world is too financialised
like to highlight this year. and global debt is too systemic to allow for a con-
tinued rise in interest rates. Beyond 2022, the tail

4
 The end of the peace dividend

will continue to wag the dog (i.e. given the expo- key commodities necessary for the energy transition
nential value of financial assets in relation to global may see upward price pressure for years to come, as
gross domestic product, changes in asset prices still supply struggles to catch up with demand.
disproportionally influence the real economy), and
central banks will only be allowed to act in an uncon- Finally, this year is exceptional in the sense that,
strained manner in the absence of systemic risk given the derating across asset classes, it provides
threats. investors the rare opportunity to (hopefully) prof-
itably reposition their portfolios for the next cycle.
Let us now turn to the most watched topic of this This, naturally, gives rise to conversations about
year, inflation. Following the geopolitical events of the emergence of a new market leadership. The
2022, we have adapted our view on long-term infla- last decade was all about the US technology plat-
tion. In the previous year’s edition of the Secular forms, known as the FAANMGs1. As the business
Outlook, we saw no structural forces warranting a models of these companies mature, it remains to
rapid and persistent rise in inflation. We expected be seen whether they can maintain their previous
economies to gradually reflate as a result of gen- above-market profitability. For our part, we surmise
erous fiscal and monetary policies and decreas- that new growth champions could emerge from the
ing inequalities. While we do not believe, as noted group of companies that manage to bring the digital
above, that global supply chains will be dismantled revolution into the physical world. After the inter-
rapidly, geopolitical frictions should nonetheless net, this is the next step in digital disruptions. The
exert enough pressure and increase supply volatility field is quite large, from robotics and automation to
to maintain average inflation in the West somewhat supply-chain optimisation, but our preferred theme
above 3%, on average, as opposed to the below 2% remains these disruptions in the life-science space,
that prevailed in the decades prior. Critically, infla- including digital healthcare and biotechnology.
tion in the new supply-constrained world is the result
of policy choices. This is of the utmost importance We hope you will enjoy reading this edition of the
for investors, who need to work extra hard to prevent Secular Outlook, and that you will find it a useful
the purchasing power of their capital from eroding. guide for your investment decisions in these turbu-
In this environment, real assets (e.g. equities) gen- lent times.
erally outperform nominal claims, such as bonds.
That said, the move towards a higher but contained
inflation world will not be smooth. Therefore, in the Yours faithfully,
not-too-distant future, even a deflationary spell may
appear, which complicates the role of central banks.
We expect both inflation and general macroeco-
nomic volatility (including economic activity as well
as financial markets) to be much more pronounced
as a result of the new geopolitical environment.

This year, we return to the subject of the energy

transition. We still maintain the view that even if
the race to net-zero may prove to be inflationary
at times in the short term, its long-term impact is
to increase efficiency and decrease energy costs.
Shorter-term price flare-ups, as those seen in 2022,
should be cyclically driven in our base case scenario.
Currently, Julius Baer commodity analysts expect
fuel prices to drop further in 2023. Accordingly, we
Yves Bonzon
do not expect a generalised commodity super cycle
Group Chief Investment Officer
to materialise this decade – even if some selected
Member of the Executive Board

 FAANMG: Meta (formerly Facebook), Apple, Amazon, Netflix, Microsoft, and Alphabet (formerly Google).
1

5
 Key secular trends

Key secular trends

Every decade is characterised by a different economic and investment environment in
which capital markets are shaped by different trends. This results in some asset classes
outperforming while others lag behind, and market leadership usually changes from one
decade to the next. In this Secular Outlook, we attempt to identify the key trends for the
current decade and to determine which asset classes will profit the most from them by
2030.

Historical secular trends

Neoliberal era State-sponsored

Bretton Woods
(Globalisation, Financialisation, Digitalisation) capitalism

Bretton Woods Floating Falling inflation Fall of the European Economic Managed Multipolarity and
exchange rates Berlin Wall and Monetary Union deleveraging in strategic reshoring
Plaza currency
western countries
Oil shock agreement Globalisation Great global Unorthodox
imbalance Shift from macroeconomic
What happened?

The Great Deng’s China Internet

inflation to policies
inflation reforms China’s rise
Electronic trading asset-price
The end of the US-dollar
Structured credit targeting
regime alternation
Emerging market
Energy transition
divergence
Life-science
EUR crisis
disruptions

1960s 1970s 1980s 1990s 2000s 2010s 2020s*

US Nifty-Fifty Small caps Government bonds Index funds Hedge funds Developed-market ‘Store of value’
stocks: 50 most quality equities equity markets
What profited?

Oil stocks Nikkei Index Nasdaq Emerging

popular US
market equities Private equity Selected
large-cap stocks Gold, CHF, Hong Kong Swiss stocks
commodities
and JPY equities Commodities High yield
USD
Global TechCare
EUR 60/40
Digital assets**
FAANMGs
USD

Source: Julius Baer

Notes: Bretton Woods was established in 1944 and became fully functional in 1958; the Berlin Wall fell in November 1989; the Euro-
pean Economic and Monetary Union refers to the launch of the euro; 60/40 = 60% equities/40% bonds; FAANMGs: Meta (formerly
Facebook), Apple, Amazon, Netflix, Microsoft, and Alphabet (formerly Google); ‘Store of value’ equity markets: equity markets in juris-
dictions where property rights and shareholder value are well protected. These jurisdictions are characterised by solid institutions, sound
governance, and efficient capital allocation; TechCare = combination of technology and healthcare; * Julius Baer projection; ** Invest-
ments in digital assets are exposed to elevated risk of fraud and loss and to price fluctuations.

6
 Key secular trends

Secular trends 2020–2029

Macroeconomic and capital-market trends shaping the decade

Multipolarity and strategic reshoring Energy transition

Depending on their national interests, many The energy transition, which aims for a shift
countries will choose to opportunistically towards net-zero carbon emissions, is in full
deviate from either the China or the US alliance. swing. However, legacy energy sources will remain
A redesign of supply chains is likely for goods that important for some time to provide energy security
are critical to national security but not on a broader during the transition period.
scale.
Life-science disruptions
Unorthodox macroeconomic policies Reinforced by the digitalisation of health-
In a highly financialised world, unorthodox care and the rise of data, life science innova-
macroeconomic policies will continue to tions will deeply impact lifestyles and the investment
dominate, including financial repression and fiscal landscape.
policy inspired by Modern Monetary Theory.

The end of the US-dollar regime alternation

Since the end of the Bretton Woods mon-
etary system and the start of floating
exchange rates, we have experienced five decades
of successive US-dollar secular bear and bull cycles.
This is changing due to the end of neoliberalism and
due to geopolitics.
Key secular trends

Multipolarity and strategic

reshoring
Depending on their national interests, many countries will choose to opportunistically devi-
ate from either the China or the US alliance. A redesign of supply chains is likely for goods
that are critical to national security, but not on a broader scale.

From the trends that arose out of the embrace of global inflation spike, especially in Europe, where
neoliberal policies in the West, the most prominent the fear of shortages in the winter continues to grab
one is globalisation. The surge in global trade that headlines. While we see ample evidence that these
was first incited by the end of the Cold War, and fears are overblown, as of now Europe’s energy secu-
later boosted by China’s accession to the World rity has been upended, and it is forced to rethink its
Trade Organization in 2001, had a tangible impact whole energy supply chain.
on most of the global population. While lifting many
people out of poverty in developing countries and Thus, on its surface, the picture seems pretty dire.
allowing for huge efficiency gains and cost reduc- Every significant geopolitical event in recent years
tions for corporations, many cite it as the prime tells us that we are on a no-return path to the inev-
reason for growing inequalities and rising populism itable restructuring of supply chains that were built
within the advanced economies. It is thus not a in the past three decades. Yet we continue to believe
surprise that as the foundations of the neoliberal that even if global trade is stagnating and geopolit-
doctrine begin to crumble, globalisation is the first ical tensions will likely also continue to send tremors
element that many suggest should be thrown out through economies and markets, a full-fledged
the window. deglobalisation and decoupling remains unlikely.

While traditional measures of trade openness have There are two reasons for this. First, we believe
been stagnating since the Global Financial Crisis, it that despite the two countries’ rhetoric and stra-
was the US’s trade war with China, which was initi- tegic ambitions, the US and China are simply too
ated in 2018 by former US President Donald Trump, economically interlinked to allow for an abrupt
that really propelled the idea of deglobalisation into and broad break in their trade relations. Reading
the mainstream. The thesis of a decoupling bipolar between the lines, we see plenty of signs that nei-
US-China world severing major global trade ties was ther nation sees this kind of outcome as desirable.
reinforced as it became clear that the US stance was The war in Ukraine has presented plenty of oppor-
not going to change with the Biden administration. tunities for diplomatic mishaps, yet overall disagree-
If anything, the animosity between the two coun- ments between the US and China have mostly been
tries has further increased since then. The Demo- focused on trade and economic competition issues,
cratic administration has not only extended bans which has allowed them to mainly express their dis-
on investment in Chinese companies but has also agreements on the subject in words, not actions.
introduced a ban on the exportation of cutting-edge
semiconductors and various key technologies to
China. Although the US, as the threatened, reigning global
superpower, seems much more resolved to contain
China, outside of sanctions and ban lists, its bilat-
With Russia’s invasion of Ukraine, the threat of eral trade with the country continues to grow, albeit
deglobalisation has never seemed more real. The at a slower pace. A recent study by the Peterson
ongoing war gives us a glimpse of what a disman- Institute for International Economics shows that, in
tling of well-established trade relations could look the four years since the start of the trade war, the
like. Soaring energy prices have exacerbated the

8
 Key secular trends

Chinese goods hit by high US tariffs have indeed goods that are of lesser strategic importance, as well
seen a significant decline in terms of US imports. as those where competitive suppliers are scarce, are
However, those goods that have not been subject unlikely to be reshored.
to levies have actually surged, increasing by 50%
(as compared to US imports from the rest of the The second reason why we believe that deglobali-
world, which increased by only 38%; see chart 1). sation will ultimately be limited is that the world is
These include such goods as laptops, smartphones, multipolar, as opposed to bipolar. Until recently, we
and video-game consoles. Meanwhile, even imports also subscribed to the bipolar view, but develop-
of some products that were hit with medium-sized ments this year have made us change our minds.
tariffs have increased. For example, the import of What these developments show is that the unques-
lithium batteries used in electric vehicles has shot tioned leadership that was, for instance, exhibited by
up due to high demand and the absence of a viable the US and the Soviet Union during the Cold War
(affordable) alternative. is not present today. Today, some countries clearly
prioritise their own objectives in favour of habitually
Overall, with international supply chains as inter- adhering to one block or another. The most prom-
twined, complex, and mutually profitable as they are inent example this year is India’s purchase of dis-
today, we believe there is no strong case for China counted Russian oil despite being a usual ally of the
and the US to fully decouple, nor, more generally, West, especially when it comes to opposing China.
for countries to fully reshore (or friend-shore) their Contrary to what some people might have expected,
businesses. The greatest incentive for a decoupling the West not only neglected to condemn the coun-
exists in key strategic sectors that are important to try for its self-serving practice, but it even confirmed
national security, such as technology (which can be the legitimacy of its decision. In a similar manner,
weaponised) or energy. In these sectors, we are likely Saudi Arabia has defied US opposition by agreeing
to continue to see government policies designed to with Russia to support oil prices. It could be argued
boost domestic production, increase resilience, and that these countries are not in the US’s core alli-
curtail ‘the other side’s’ efforts to succeed. However, ance against China – after all, they are not part of

Chart 1: US imports from China diverge depending on trade tariffs

Value of US imports by provenance and tariff list (Index, June 2018 =100)

150

July 2018:
US starts tariff war
125

100

75

50
2017 2018 2019 2020 2021 2022
China – all product categories China – high tariffs
China – medium tariffs China – no tariffs
Rest-of-the-world Pre-trade war trend in total US imports

Source: Peterson Institute for International Economics, Julius Baer

Note: Data as at July 2022. The grey trendline is the pre-trade war trend based on US imports from the world – August 2016 to June
2018 (trend based on linear regression).

9
Key secular trends

‘the West’. However, even the European Union (EU)

has shown a willingness to carve its own path; given
its profitable trade ties with China, it is reluctant to
take steps similar to those undertaken by the US.
While its approach to China is likely to become more
cautious, we do not expect the EU to back the US
one-to-one on their rivalry with China, especially as
the US itself is prioritising its own economy (e.g. by
subsidising their green energy industry, to the dis-
may of European colleagues).

A multipolar world order is fertile ground for geopo-

litical mishaps, as the higher the number of actors
there are with their own national interests, the
harder it is to predict other players’ moves. This lies
at the basis of our view that overall geopolitical risk
will rise. However, this is also an environment where
beneficial diplomatic and trade relations are harder
to stamp out and one that speaks for a slowdown in
global trade, rather than its outright decline.
 Key secular trends

Investment implications of the

‘end of the peace dividend’
When globalisation is expanding and geopoliti- Similarly, investors who could previously invest glob-
cal tensions among the world’s largest economies ally without much concern for international regula-
are subdued, investors benefit from not having to tory and confiscation risk will need to think harder
devote much attention to international diplomatic about the consequences of geographical exposure.
spats when making investment decisions. In such a Depending on their preferences and risk tolerance,
scenario, the primacy of profit maximisation means they might be exposed to the risk that their invest-
that conflicts can reliably be put aside in order to ment could essentially be marked down to zero if the
preserve business interests. However, in the current wrong geopolitical elements collide.
environment, as the weight of geopolitical and eco-
nomic priorities gets recalibrated, this tailwind is More broadly, we believe the increase of these risks
decreasing. makes a strong case in the years to come for what
we call ‘store-of-value’ equity markets. These are
China’s shift to ‘common prosperity’ and its crack- located in jurisdictions where property rights and
down on digital platforms, especially those vulner- shareholder value are well protected and are charac-
able to US regulations, have permanently impaired terised by solid institutions, sound governance, and
the value of some of the country’s market leaders. efficient capital allocation. Our preferred examples
More recently, the sanctions imposed on Russia are the US, Sweden, and Switzerland. Their respec-
have exposed the risk that investors face by invest- tive equity markets have actually outperformed
ing in markets that may be subject to financial war- global equities in the past five decades, both in more
fare. These developments prompted us to reverse inflationary and geopolitically charged times, as well
our decision to promote China to core-asset-class as in periods of low inflation.
status.

Chart 2: ‘Store-of-value’ equities have outperformed global markets

Average annualised performance (in USD) Cumulative performance indexed (31.12.1970=1),
in USD, log scale
16.1%
625

13.3%
125
12.5%
11.3%
10.2% 10.0% 25
9.0%
8.1%
5

1
Inflationary environment Disinflationary environment 1970 1980 1990 2000 2010 2020

MSCI World US Switzerland Sweden

Source: Bloomberg Finance L.P., Thomson Reuters Datastream, O. Jordà, M. Schularick, and A.M. Taylor (2017). Macrofinancial History
and the New Business Cycle Facts. In NBER Macroeconomics Annual 2016, volume 31. O. Jordà, K. Knoll, D. Kuvshinov, M. Schularick,
and A.M. Taylor (2019). The Rate of Return on Everything, 1870–2015. In Quarterly Journal of Economics, volume 134.
Notes: Based on annual data. The inflationary environment comprises the period 1970–1990. The disinflationary environment comprises
the period 1990–2021. Past performance and forecasts are not reliable indicators of future results. The return may increase or decrease
as a result of currency fluctuations.

11
Key secular trends

Unorthodox macroeconomic
policies
In a highly financialised world, unorthodox macroeconomic policies will continue to domi-
nate, including financial repression and fiscal policy inspired by Modern Monetary Theory.

Just like us, monetary authorities initially did not This stark shift in the policy landscape is confront-
expect the 2021–2022 inflation spike to be as ing investors with an important question: “Is this the
strong, and certainly not as persistent, as it turned end of unorthodox policies and financial repression?”
out to be. On one hand, supply-chain difficul- With the US 10-year Treasury yield having breached
ties related to the global pandemic did not dis- the 4% threshold in late September and short-term
sipate as quickly as expected. China’s continued rates expected at around 5% next spring, it certainly
zero-Covid-19 policy contributed to that, while would not be a stretch to say that we are done with
Russia’s invasion of Ukraine added fuel to the fire zero-to-negative interest rates, quantitative easing,
by jacking up energy prices and taking the inflation and Modern Monetary Theory (MMT)-inspired
problem to the next level. On the other hand, in the policies.
US, demand turned out to be exceptionally resili-
ent. Once again, Covid-19 and its aftermath are As with other apparent big shifts this year, we prefer
most likely to ‘blame’ here. The generous US gov- to take such predictions with a pinch of salt. Sim-
ernment stimulus meant to compensate for income ply stated, many of the trends that led us to declare
losses from the lockdowns was most likely more than the new era of state-sponsored capitalism are still
enough to provide households with a buffer well well in play. Crucially, we maintain the view that the
beyond the reopening of the economy. Additionally, ‘tail is wagging the dog’, i.e. given the exponential
a structural shift in the labour market significantly value of financial assets in relation to global gross
shrunk the US labour force. A wave of early retire- domestic product, changes in asset prices still dis-
ments and a drop in the immigrant workforce coin- proportionally influence the real economy. 2022
cided with a shortage of workers in the lower-paying tried its best to make us believe the opposite – after
industries that were hit by the pandemic, which pro- all, despite the sharpest drop in liquidity supply in
vided a nice boost in wages for the group. decades, the US economy, though predictably slow-
ing, manages to stay remarkably on course thanks to
The result of this toxic inflationary mix was the the changes on the labour market described above.
180-degree pivot from dovish to hawkish by the Fed At one point, though, if the Fed continues to blindly
and the most violent hiking campaign of the fed- tighten, something will break, and this breakage will
eral funds target rate on record. The central bank likely constrain its tightening intentions substantially.
proceeded with several 50 and 75 basis-point rate We saw a similar scenario play out in the UK, as the
hikes, restarted its quantitative tightening experi- Bank of England reopened the asset purchase taps
ment, and repositioned itself as an inflation fighter, in order to rescue the British pension fund market.
rather than the ‘perma-dove’ it had channelled just Since then, the turmoil has calmed down, but one
12 months prior. At the same time, US fiscal policy, could imagine a situation in which the financial dis-
despite making a lot of noise with catchy-sounding ruption is much greater. Another example lies in the
bill names (e.g. ‘Build Back Better’ and ‘Inflation crypto space, where the liquidity crunch did, in fact,
Reduction Act’), is expected to be one of the largest cause something of a Lehman-style meltdown in
drags on gross domestic product in the next couple the digital-asset ecosystem. Luckily, this ecosystem
of years. These programmes are projected to be, at is too isolated from the broad market and is small
best, fiscally neutral. enough to be contained within its own sphere.

12
 Key secular trends

Overall, the sheer volume of financial assets and to have any hope of reshoring key industries or suc-
global debt would not allow for a continuous rise in ceeding in their ambition to achieve net-zero car-
interest rates and yields, as its potential to cause sys- bon emissions. The fiscal wave might have rolled
temic problems is too high. Actually, the best tools over for now, but we see this changing throughout
for eroding the global debt burden while avoiding the decade, as we get to know the true meaning of
a disorderly collapse of debt are low interest rates ‘state-sponsored capitalism’. In five years’ time, we
combined with a healthy (meaning higher, but con- might be surprised at just how large the monetary
tained, i.e. between 3% and 4%) dose of inflation. and fiscal policy toolbox has become, as policymak-
ers harness their full potential (including the lessons
Looking at the outlook for fiscal policy, advanced learned from over a decade of unconventional pol-
economies continue to suffer from record inequal- icymaking) to deal with higher structural inflation
ities, ageing demographics, and stagnating econ- and elevated macroeconomic volatility in a highly
omies, and there is still tremendous pressure on financialised world (see ‘Asset allocation in a 3%+
governments to alleviate these problems. Moreo- inflation world’ on p. 15).
ver, government support is essential for countries
Key secular trends

The end of the US-dollar

regime alternation
Since the end of the Bretton Woods monetary system in the early 1970s and the start of
floating exchange rates, we have experienced five decades of successive US-dollar secu-
lar bear and bull cycles. This is changing due to the end of neoliberalism and shifting
geopolitics.

Understanding the implications of the US-dollar combined with the curtailment of Russian access to
regime has actually been the most important asset the SWIFT payment system, is the first time in his-
allocation input, tightly linked to the investment tory that the global financial system and the US dol-
trend dominating markets in each decade. Dur- lar have been weaponised against a major economic
ing secular US-dollar bull markets, US assets have power. It would be hard to overstate the geopolitical,
outperformed the rest of the world, and during economic, and financial ramifications, as this inci-
secular bear trends, the rest of the world has outper- dent is tantamount to the end of the peace dividend
formed US assets. Since 2011, we have experienced that has contributed to the rising prosperity of the
a US-dollar secular bull market again. This sequence global economy over the past three decades. Indeed,
has been driven by the unique status enjoyed by financial markets are no longer immune to geopolit-
the greenback as the world’s main reserve currency. ical affairs, and financial warfare means that poten-
Most of the global trade in goods and services has tial international diversification benefits give way to
been, and still is to a large but declining extent, con- confiscation risk.
ducted in US dollars.
Furthermore, unorthodox macroeconomic policies,
Today, the rise of China is changing this dynamic in including those inspired by MMT, where recurring
multiple ways. China is intent on breaking free from public deficits are monetised by the central bank,
the dollar-dominated system and establishing the are still very much on the US policy agenda. Yet
CNY (or the e-CNY) as a stable global reserve cur- nowadays, all major advanced economies are doing
rency. The Russian invasion of Ukraine and West- the exact same thing to various degrees. Accord-
ern sanctions imposed on the aggressor will further ingly, in a higher inflation world, the US dollar is not
accelerate this effort. Already today, discount Rus- expected to debase against other paper currencies
sian oil bought by China is paid in renminbi. The but rather against real assets: equities, gold, and real
freezing of Russian companies’ assets and the estate, in that order.
Russian central bank’s foreign-exchange reserves,

14
 Key secular trends

Asset allocation in a 3%+

inflation world
In the new geopolitical landscape, we expect struc- we could be as likely to face inflation spikes in the
tural inflationary pressures to be more balanced. future as we are to witness deflationary episodes.
While all of the forces presented in chart 3 below Moreover, an increase in algorithmic trading would
were present well before the breakout of the war in likely only amplify the macroeconomic uncertainty,
Ukraine in February 2022, it was this conflict that making rapid and violent price moves much more
signalled the end of the ‘supply-abundance’ era. In frequent.
the four decades of neoliberal orthodoxy, expand-
ing globalisation meant that price pressures from If the primary goal of investing is to preserve wealth,
supply shortages were virtually non-existent. Today, then inflation is a portfolio’s worst enemy. How can
supply scarcity is much more likely to occur, creating a portfolio be protected from inflation erosion? The
other inflation incidents like the one we are currently first line of defence is investing in real assets. Usu-
experiencing. This does not mean that inflation will ally this refers to physical goods, such as commod-
stay nearly as high as it is today, but, on average, we ities, including gold, as well as real estate. However,
expect long-term US inflation to settle somewhere it is often forgotten that equities, which give invest-
above 3%, well over the last two decades’ high point ors ownership of a real-life business, are also real
of 2%. Moreover, the unpredictable nature of supply claims. In the long run, and when average inflation
issues and the increasing importance of political fac- is higher but subdued (as expected in our base-case
tors is likely to make inflation, and other key macro- scenario), equities outperform. Commodities are
economic variables, much more volatile. Hence,

Chart 3: The structural forces behind inflation

DISINFLATIONARY INFLATIONARY

Energy transition Strategic reshoring

(in the long term)
Unorthodox macroeconomic policies
Higher productivity
Energy transition
Debt (in the short term)

Technology Decreasing inequalities

Source: Julius Baer CIO Office

15
Key secular trends

too volatile to form a solid backbone for the typical portfolios could be positioned to be able to profit
investment portfolio and work only when inflation is from both inflationary and deflationary spells. For
exceptionally high and rising. Purely financial assets, example, this could be achieved through the right
such as bonds, have historically provided limited balance of equity styles. Second, investors could
protection against inflation. They remain a crucial take a tactical approach by investing in assets that
portfolio building block, be it for downside protec- would profit the most from higher or lower inflation,
tion or for return-enhancing carry. Following the his- depending on the market situation. Inflation-linked
torical bond market sell-off of 2022, bonds are once bonds would work well in an environment where
more priced for attractive returns in the short-to- inflation is expected to accelerate. The same goes
medium term. for equity markets that are exposed to commodities.
If expected inflation is on a downward trajectory, US
What is the best way to deal with higher volatility? Treasuries and defensive equities should typically
The short answer is that investors are going to have outperform.
to learn to live with it. Fighting against volatility by
attempting to stamp it out completely would most
likely turn out to be counterproductive, as volatil-
ity also goes hand in hand with returns. However,
there are ways to extract the most from it. First,

“What is the best way to deal with higher volatility? The

short answer is that investors are going to have to learn to
live with it.”

Yves Bonzon
Group Chief Investment Officer
 Key secular trends

Energy transition
The energy transition, which aims for a shift towards net-zero carbon emissions, is in full
swing. However, legacy energy sources will remain important for some time to provide
energy security during the transition period.

This year has put global markets to the test, to rollercoaster? The short answer is no. The longer
say the least. Continued global supply-chain dis- answer, however, is not as black and white.
ruptions, a war in Ukraine, and an unfortunate
maintenance schedule for nuclear power plants in One year ago, in the prior edition of this publication,
France has unsurprisingly proved to be an explo- we explicitly stated that the global shift to more sus-
sive mix for global energy prices. Additionally, var- tainable energy sources would not be a smooth jour-
ious media outlets, alongside a great number of ney and that the first bumps in the road were already
financial analysts, did not hold back in predicting a noticeable. Twelve months later, it has become clear
freezing Europe this winter, sending investors into that we might have underestimated the emerging
panic mode. Critics of green and renewable ener- challenges and that some of these bumps in the
gies were quick to find a scapegoat for this accumu- road have turned out to be potentially car-wrecking
lation of mishaps: the ongoing energy transition. Is potholes. The war in Ukraine has demonstrated
the world’s shift towards net-zero carbon emissions how dependent Western Europe still is on imported
and the subsequent decrease in investments into Russian and nuclear energy. Despite significant
fossil fuels really to blame for this year’s energy price

Chart 4: Industrial metals exposure to structural trends

Lithium
Cobalt USD 6.3 bn
USD 8.7 bn 0.3 mt
0.2 mt
Copper
USD 230 bn Nickel
USD 48 bn
Aluminium 25 mt
2.6 mt
USD 166 bn
67 mt
Steel
USD 2282 bn
Iron ore 1,950 mt
USD 216 bn
1,353 mt

High exposure to chinese economic slowdown High exposure to energy transition

Net-negative impact Neutral demand impact Net-positive impact

Source: International Aluminium Institute, International Copper Study Group, International Nickel Study Group, United States Geolog-
ical Survey, Julius Baer
Notes: Bubble sizes show market size; volumes and values based on 2021 production and average annual prices. The vertical position of
the bubbles also illustrates the demand impact. A higher position indicates higher demand, a lower position lower demand. Mt = metric
tonnes; bn = billions

17
Key secular trends

investments into renewable energy sources in the

past few years, the system was not yet ready to
Commodity super
entirely absorb the shock of being cut off from Rus-
sian supplies, which raises concerns about energy cycle explained
security and energy affordability going forward.

With inflation still on top of investors’ minds

This is the first time in history that we are not adding
and commodity prices reaching multi-year
new energy sources but are rather trying to replace
highs earlier this year, before somewhat
existing ones. The challenge here is that the legacy
retreating again, the debate on whether the
energy-supply machine has to keep running and
global economy will enter a so-called com-
continue to be maintained while the new system is
modity super cycle continues to be held
being built. This has two major implications for the
intensively. However, what exactly is a com-
unfolding decade. First, the energy transition will
modity super cycle?
be inflationary in the short term. Transitioning the
whole system – from households to transportation
to heavy industry – towards net-zero carbon emis- The most common definition states that
sions will require massive investments, from the pri- a commodity super cycle comprises a sus-
vate as well as the public sector. In a decade that tained, multi-year uptick in commodity prices,
will be dominated by the increasing cost of capital, driven by a sustained structural imbalance in
this will inevitably push prices upwards. However, it demand and supply. As supply fails to meet
is important to mention that extreme price flare-ups demand over a prolonged period of time,
like the ones we have seen this year are cyclical and commodity prices are allowed to rise signifi-
will eventually revert towards their mean. In the long cantly above their long-term trends.
term, we still believe that technological advance-
ments in this space will increase productivity enough Historically, commodity super cycles are a
to provide abundant energy at cheaper prices and relatively rare phenomenon, as they tend
thus be disinflationary. Second, we will not become to arise only from radical changes in the
independent of fossil fuels in the 2020s. The leg- global supply-demand balance in commodi-
acy energy sources will continue to play a role in the ties. Over the course of the last century, the
coming years, especially as a shock absorber when global economy has been subject to four such
clean energy is unable to handle the stress caused by cycles. The first emerged after US industri-
demand outstripping supply in the system. alisation gathered pace shortly before we
entered the 20th century. The second started
While the energy transition is in full swing and the in the 1930s amid the widespread adop-
adoption of clean-energy sources in society is well tion of the motor car and sustained demand
underway, it will take significantly longer for heavy for armaments in light of the looming Sec-
industry, for example, to become independent from ond World War. The third emerged in the
highly carbon-intensive commodities and be able to late 1960s and was strongly accelerated in
rely on clean-energy sources entirely. the 1970s amid two consecutive oil shocks.
The fourth and most recent one kicked off
shortly after the turn of the millennium, when
Increasing geopolitical uncertainty, short-term infla-
China entered the World Trade Organization
tionary pressures, and continued reliability on fossil
(WTO).
fuels could imply that we are entering a new com-
modity super cycle. Whether or not this is the case
is of utmost importance, as, historically, decades
have been characterised by the market leadership of
either information technology or oil and raw mater-
ials. The thesis of a commodity super cycle is tempt-
ing in view of the slow dissolution of supply-chain
bottlenecks and the ongoing energy transition. How-
ever, we believe it is impossible to witness such a

18
 Key secular trends

broad-scale super cycle without an accompanying peak in 2030), the energy transition will be its sin-
oil super cycle. Nonetheless, we do not see a strong gle strongest driver until the middle of the century,
case for the latter, as supplies are constrained polit- which will lead to a continuously growing global
ically rather than structurally, and as imminent struc- copper consumption. Looking at the supply side, we
tural demand headwinds will arise, especially from expect to see a significant slowdown in mine-supply
China. growth from the middle of the decade before an
acceleration of scrap supplies due to a faster recy-
It is important to note that this unlikeliness of a cling cycle for electric-vehicle batteries will finally
broader commodity super cycle does not mean that be able to offset this gap. All in all, this temporary
certain commodities will not experience a period imbalance between growing demand and simultane-
of elevated prices during this decade. Looking at ously declining supply leads to a very strong struc-
industrial metals, for example, there are two oppos- tural outlook for copper in the coming decade, which
ing structural trends at work influencing demand. should push prices from today’s level of around USD
China’s demographics and its economic transition 8,350 back to above USD 10,000 per tonne, and
towards slower growth act as a negative price pres- potentially beyond in the longer term. Copper thus
sure, while the growth of clean technologies has a joins the energy-transition-driven battery-metals
positive influence. One metal that deserves more super cycle (including nickel, cobalt, and lithium).
attention in that regard is copper. Despite China That said, prices are still susceptible to short- and
slowly moving from boosting to breaking copper medium-term swings, reflecting a mix of the market
demand (Chinese copper demand is expected to mood and the cyclical economic environment.
Key secular trends

Life-science disruptions
Reinforced by the digitalisation of healthcare and the rise of data, life-science innovations
will deeply impact lifestyles and the investment landscape.

Apart from defining the prevailing macroeconomic The business models of some of these companies
trends, our yearly Secular Outlook also seeks to are under serious pressure and raise questions about
identify the market leaders of the unfolding decade. their future viability as we enter the next phase
If historical evidence is anything to go by, the win- of the information age. The FAANMGs urgently
ners of the past decade are unlikely to be the win- need to focus on spiralling costs in order to main-
ners of the current decade. While the FAANMGs tain their relevance as building blocks in portfolios.
have been at the forefront of shareholder value cre- While some members of the group are unlikely to
ation over the past years of secular disinflation, we be able to reverse the current negative profitability
are starting to see a gradual shift, which marks the trend, others will probably succeed in transforming
end of the FAANMG supremacy over the US equity themselves from growth engines into mature qual-
market. This raises two major questions. What role ity companies. Those that successfully manage this
will the FAANMGs play in investors’ portfolios going transition will continue to have their place in invest-
forward, and what companies will take over the mar- ors’ portfolios.
ket leadership?

Chart 5: The Secular Outlook asset class scorecard

Total return
150%

100%

50%

0%

-50%

-100%
S&P 500

EM debt (local)
USD/EUR

European gov’t bonds

US REITs

MSCI EMU

US high yield
Bitcoin

Rogers Commodity Index

Nasdaq Biotech

Gold

Europe high yield

MSCI EM
Nasdaq

US Treasuries

EM currencies

EM debt (HC)

MSCI China

Decade-to-date performance 12-month performance

Source: Bloomberg Finance L.P., Julius Baer

Notes: Data as at 30.11.2022. The chart shows data from January 2020 to November 2022 to highlight relevant events. EMU = Euro-
pean Monetary and Economic Union; REITs = real estate investment trusts; EM = emerging markets; HC = hard currency. Government
(gov’t) bonds – performances are given in USD; US Treasuries exclude Treasury bills; EM debt (HC) includes both sovereign and corpo-
rate bonds; EM debt (local) includes only sovereign bonds; EM currency returns include carry returns from a buy and hold carry (equal
weight) trade position in eight emerging market currencies fully funded with short positions in US dollars. Past performance and per-
formance forecasts are not reliable indicators of future results. The return may increase or decrease as a result of currency fluctuations.

20
 Key secular trends

In the past decade, breakthrough innovations have

revolved around the digital world and the manipu-
Digital asset check-in
lation of digits therein, paving the way for the rise
of highly competitive companies that have business
models centred around e-commerce, social media, Talking about disrupting tech-
online streaming, and cloud computing. We believe nologies and potentially outperforming asset
that the innovation focus will now move from the classes, we should take the opportunity for a
digital to the physical world. This will result in a short update on blockchain technology and
broad spectrum of emerging investment themes, digital assets1 at this point. Granted, this year
including the shrinkage of factories and the atrophy the word outperformance and digital assets
of supply chains, the spread of robotics and auto- were hardly ever heard in the same sentence.
mation, alternative energy and transport platforms, Nonetheless, we continue to take a construc-
disintermediation facilitated by the blockchain tech- tive but cautious approach to the crypto
nology, disruptions in the life-science space as tech- space. Constructive because the innovation
nology and healthcare merge, as well as applications potential of blockchain (and decentralised
to improve energy and resource efficiency. Granted, ledger technology) is considerable. Cautious
2022 was a tough year for equity investments in because we are aware that these assets are
emerging growth themes. However, we believe ultra-sensitive to liquidity, as the downturn
that while growth prospects have been reassessed in the first half of 2022 impressively demon-
and repriced accordingly, the underlying long-term strated. After the recent turmoil, the indus-
trends remain firmly in place. try is set to evolve towards greater regulation
and convergence with the centralised finan-
One area that we specifically like and consider to cial system, in which many business mod-
be ripe for disruptive innovation is life sciences. We els will have to adapt to the digitalisation of
have been advocating this for several years now, assets.
since we see life sciences as a major driving force
underpinning the future of healthcare. Specifically, 1
 Investments in digital assets are exposed to elevated
the surge in health data constitutes a key aspect of risk of fraud and loss and to price fluctuations.

the transformation in the life-science space. With

the desire to keep costs low, reduce inefficiencies,
improve access, and make medicine more person-
should still garner attention over the longer term
alised for each and every patient, healthcare pro-
due to their vast potential to enhance the delivery of
fessionals and governments around the world are
care to individuals.
increasingly turning to technology as a means of
addressing some of the 21st-century challenges
facing the industry. As far as the experience of Going beyond digital healthcare, life sciences as a
patients and consumers is concerned, digital-health growing field of study will become ever more impor-
technologies have proven their worth in terms of tant in tackling some of the major health challenges
convenience and affordability during the Covid-19 facing humankind. As a case in point: cancer immu-
crisis. The pandemic has not only accelerated the notherapy is emerging as one of the most promis-
digital transformation of the healthcare industry but ing treatments against the illness, potentially paving
has also further reinforced the growing acceptance the way towards the availability of a more precise,
of digital technologies among care providers and personalised treatment for the nearly 20 million
their recipients. The heightened interest in digital people worldwide who are diagnosed with the med-
technologies can be evidenced by the growing vol- ical condition every year. The greater adoption
ume of fund inflows into the sector in recent years. of digital-health technologies and other innova-
In particular, 2021 was the year when digital-health tive solutions, such as gene-based therapies, could
funding activity unquestionably took off in the strengthen our resistance to present as well as future
world, especially across the United States. While we health threats and ease the pressure on current
expect funding to ebb in the short term in light of healthcare systems.
stellar performance in 2021 and due to the current
market environment, digital-health technologies

21
Key risk factors

Key risk factors

Underlying risk drivers that increasingly play a role in investors’ portfolios

Climate change Sino-US decoupling

The physical risks of climate change are The strategic confrontation between the
becoming more evident by the day. From US and China continues. With every new
rising sea levels to desertification, the consequences trade-war development and diplomatic escalation,
are substantial, including the destruction of produc- the prospects for the economic cycle and financial
tive assets, forced migration, and a slowdown in eco- markets will be challenged.
nomic growth.
Dormant systemic risk
Rise in cyber risk Key systemic risk indicators have to be con-
In an increasingly digitalised and connected tinuously monitored to assess whether any
world, cybercriminality and ransomware will systemic issues (i.e. issues that threaten the stability
continue to pose an increasing threat to businesses of the economic and financial systems) pose a threat
and individuals, as well as governments and the to the economic cycle and the overall outlook.
economy.

Infrastructure risk
Infrastructure risk lies at the crossroads
between climate change and cyber risk. This
prompts governments to accelerate their efforts
against those threats and also pushes infrastructure
projects to become resilient to them.
 Appendix

Appendix
Table 1: Performance over the last five years

Asset class YTD 2021 2020 2019 2018

Bitcoin -63.1% 59.8% 305.1% 94.8% -73.8%

Nasdaq -25.7% 27.5% 48.9% 39.5% 0.0%
S&P 500 -13.1% 28.7% 18.4% 31.5% -4.4%
Rogers Commodity Index 20.7% 41.1% -7.7% 11.9% -9.2%
Gold -4.5% -3.5% 24.4% 18.9% -2.1%
Nasdaq Biotech -7.4% 0.0% 26.4% 25.1% -8.9%
US REITs -20.4% 43.1% -7.5% 25.9% -4.5%
US high yield -10.6% 5.3% 7.1% 14.3% -2.1%
MSCI EMU -17.1% 14.3% 8.7% 24.4% -16.2%
European high yield -10.0% 3.4% 2.3% 11.3% -3.8%
US Treasuries -12.0% -2.3% 8.0% 6.9% 0.9%
MSCI Emerging Markets -18.7% -2.3% 18.8% 18.8% -14.3%
EM debt (hard currencies) -16.1% -1.8% 6.9% 13.5% -2.2%
European government bonds -14.5% -3.5% 5.0% 6.8% 1.0%
EM currencies -2.0% -5.0% -2.8% 3.4% -6.4%
USD/EUR -8.5% -6.9% 8.9% -2.2% -4.5%
EM debt (local currencies) -12.0% -9.2% 3.5% 10.1% -6.9%
MSCI China -27.1% -22.6% 27.6% 21.3% -20.2%

Source: Bloomberg Finance L.P., Julius Baer

Notes: Data as at 30.11.2022. EMU = European Monetary and Economic Union; REITs = real estate investment trusts; EM = emerging
markets; HC = hard currency. Government (gov’t) bonds – performances are given in USD; US Treasuries exclude Treasury bills; EM
debt (HC) includes both sovereign and corporate bonds; EM debt (local) includes only sovereign bonds; EM currency returns include
carry returns from a buy and hold carry (equal weight) trade position in eight emerging market currencies fully funded with short posi-
tions in US dollars. Past performance and performance forecasts are not reliable indicators of future results. The return may increase or
decrease as a result of currency fluctuations.

23
Important legal
information
 Important legal information

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[email protected] legal, accounting or tax advice, or a representation that
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1
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ing under the laws of the Grand Duchy of Luxembourg,

27
Important legal information

Wapping Street, North Wall Quay, Dublin 1, D01 F7X3, Financial Sector Conduct Authority. Julius Baer is also
Ireland. Bank Julius Baer Europe S.A. is a bank incorpo- licensed in South Africa as a representative office of a for-
rated and existing under the laws of the Grand Duchy eign bank.
of Luxembourg, with registered office at 25, rue Edward
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anonyme incorporated and existing under the laws of the
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cial services provider (FSP no. 49273) approved by the
ited range of investment products (restricted advice).

28
Uruguay: In case this document is construed as an offer,
recommendation or solicitation for the sale or purchase of
any securities or other financial instruments, the said offer,
recommendation or solicitation is being placed relying on
a private placement exemption (oferta privada) pursuant
to Section 2 of Law No. 18,627 and is not and will not be
registered with the Superintendency of Financial Services
of the Central Bank of Uruguay to be publicly offered in
Uruguay. In case of any closed-ended or private equity
funds, the relevant securities are not investment funds
regulated by Uruguayan Law No. 16,774 dated 27 Sep-
tember 1996, as amended. If you are located in Uruguay,
you confirm that you fully understand the language in
which this document and all documents referred to herein
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UNITED STATES: NEITHER THIS DOCUMENT NOR

ANY COPY THEREOF MAY BE SENT, TAKEN INTO
OR DISTRIBUTED IN THE UNITED STATES OR TO
ANY US PERSON.

© Julius Baer Group, 2022

29
Notes

30

 Founding Signatory of:

JULIUS BAER GROUP The Julius Baer Group is present in around 60

locations worldwide, including Zurich (Head
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Bahnhofstrasse 36 Hong Kong, London, Lugano, Luxembourg,
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Switzerland and Tel Aviv.
Telephone +41 (0) 58 888 1111
Fax +41 (0) 58 888 1122 12/2022 Publ. No. PU00960EN
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