As a new world order emerges, our portfolios are adapting. Geopolitical fragmentation is driving spending in developed economies and creating opportunities in emerging markets. Our annual Strategic Asset Allocation (SAA) review – the long-term framework behind the bulk of portfolio returns – introduces adjustments to broaden sources of performance. Based on expected asset class evolutions over the next decade, these changes increase diversification and position portfolios for phases of volatility.
2025 starkly illustrated just how competition and geopolitical tensions are shifting strategic national priorities. That is driving fiscal spending towards achieving strategic autonomy in sectors such as technology, infrastructure and energy, while tariffs are raising trade barriers and reshaping supply chains. In addition, the impacts of climate change, conflict and access to resources are also reshaping the landscape for investment opportunities. This has created slightly higher ‘neutral’ interest rates – that neither drive nor limit economic growth – in most regions compared with the pre-pandemic era. Such structurally higher rate levels are being combined with elevated equity valuations after a solid performance for stocks in recent years, and optimism around the potential of artificial intelligence (AI). Higher interest rates and high valuations help determine the broad outline of investment returns over the decade ahead.
We expect global equities to keep delivering solid returns thanks to their exposure to both corporate growth and profitability. Stocks therefore form the backbone of portfolios for investors seeking to grow their capital. Rising global investment needs support the medium-term outlook for corporate earnings. However, the above-average returns of equities over the past decade may be hard to repeat. Corporate valuations are now high by historical standards, and the returns that the asset class delivers above government bonds or the ‘equity risk premium’, are relatively low, particularly for the US market.
