There are several reasons for this: First, economic data will be extraordinarily difficult to read; forthcoming data sets are likely to be as distorted to the upside as they've been to the downside as a result of lockdowns and social distancing measures introduced in the past year. Second, although the unprecedented disruptions and bottlenecks to global supply chains—from commodities to labor—should unwind soon (in theory), when that will actually happen remains challenging to predict with any degree of certainty. Third, as most developed economies make their way out of the COVID-19 recession, they should find themselves in the early stage of the next economic and market cycle; however, it isn’t clear whether this coming cycle will bear conventional characteristics like those we’re familiar with, particularly in view of how we got here in the first place. That said, there remains important macroeconomic pillars that can guide investment decisions, in both the near term and the long term. 

Five-year asset class forecasts—expected return components (%)

With the reopening taking root in key developed economies, we find ourselves gravitating toward a cyclical expansion with reduced uncertainties. While the pace of the reopening will likely be uneven, in aggregate, we believe the global economy is on track to see broad improvements in general economic activity, from household spending to global trade. While a great deal of economic data will be distorted by year-over-year (YoY) base effects, supply chain disruptions, and the impact of stimulus measures, the risk of a global recession taking place over the next three years is much lower than it was in the three years leading into the pandemic. Further, uncertainties surrounding the virus itself are shrinking as vaccination efforts ramp up globally, albeit with some regional differences. In our view, this should allow for a gradual return to business as usual and, along with it, more traditional economic fundamentals, most of which are positive. While this doesn’t mean we can wave goodbye to periods of risk off in the market, nor does it tell us how long this next cycle will last, it does suggest that we can be generally optimistic about the economic trends in the coming years.

Broadly speaking, we expect global central banks to embark on a path toward normalization, (very) slowly unwind the extraordinary monetary policy measures introduced during the crisis—albeit at a different pace. This will likely begin with a tapering of current asset purchases in 2021/2022—a step already taken by the Bank of Canada (BoC)—which is likely to inject some volatility, as such maneuvers typically push market-based bond yields higher both mechanically and through the expectations channel. We don’t, however, expect most global central banks to hike policy rates until 2023/2024 and, combined with what’s likely to be a great deal of sovereign debt issuance, we therefore expect global yield curves to steepen. While the speed and timing of this expected yield curve steepening will matter to the broader risk market, we view this as a positive development, as it’s emblematic of a normalizing economy. 

In our base-case scenario, we expect to see some near-term inflation pressure due to base effects, supply chain disruptions, and a jump in services activity as economies reopen. However, we believe these price pressures will ultimately prove to be transitory as bottlenecks ease, more labor supply comes back online, and pent-up demand fades. Our longer-term inflation model suggests inflation in most developed markets will be closer to the lower end of the 2.0% to 2.5% YoY range. That said, a protracted period of elevated commodity prices and/or labor shortage would be a key risk to our inflation outlook. 

Opportunistic perspectives
Short-term asset allocation view (6–12 months)

Despite our belief that interest rates will gradually rise, they’re likely to stay near historic lows and struggle to exceed prepandemic levels, even over the course of the next few years. With muted returns expected in the fixed-income space, particularly in global government debt, asset classes that can provide additional yield are likely to find favor with investors; this is especially true for asset classes that can also provide diversification benefits. This perspective underpins some of our higher-conviction views, such as our overweight stance on emerging-market (EM) debt. It also explains why we have an improved outlook on certain alternative assets, such as real estate investment trusts (REITs). 

Finally, we expect the U.S. dollar (USD) to weaken over our forecast horizon, driven by wider fiscal and current account deficits in the United States as well as a central bank—the U.S. Federal Reserve (Fed)—that’s expected to continue to provide ample liquidity and remain dovishly positioned relative to other global central banks. A weaker USD will typically translate into tailwinds for a variety of asset classes, including EM assets (both debt and equity) and select developed-market equities and fixed income. 

Strategic perspectives
Long-term asset allocation view (3–5 years)