SECULAR OUTLOOK

2020–2029, YEAR III

Economic and investment trends

M ARKE TI NG M ATE RIAL

P UBLI C ATION D ATE: 8 D ECE MBE R 2021
 Please find important legal information at the end of this document.
Source: Bank Julius Baer & Co. Ltd. (Julius Baer), unless explicitly stated otherwise.

2
 C O N TEN TS

SECULAR OUTLOOK
2020–2029, YEAR III

4
A MAJOR INFLECTION POINT

6
KEY SECULAR TRENDS

7
KEY MACROECONOMIC TRENDS

11
KEY CAPITAL MARKET TRENDS

15
KEY RISK FACTORS

17
IMPORTANT LEGAL INFORMATION

3
 SE C ULAR O UTLOOK 2020–2029, Y EAR I II
A MAJOR INFLECTION POINT
Dear Reader,
Autumn has arrived, and, as is the case every year,
the time has come to gather Julius Baer’s top invest-
ment and research experts to exchange ideas and
try to carve out the most important secular trends
that will shape the economy and capital markets
during this decade. This exercise is of the utmost im-
portance, because as long-term investors, we cannot
afford to swim against the tide. Every decade is
characterised by a different economic and invest-
ment environment, and the leading asset classes of
the last decade are generally superseded by other
ones in the following decade.
This year, the identification of structural forces, as
well as their disentanglement from cyclical ones, has
proved to be even more challenging than usual. We
are at an important inflection point. Not only are we
at the beginning of a decade, a time when new
trends are still hidden and simmering under the sur-
face, but we are also at the tail end of four decades
of disinflation. Society in advanced economies is
transitioning from neoliberal orthodoxy to an era of
‘state-sponsored capitalism’. The former is charac-
terised by fiscal prudence and monetary policy dom-
inance, while the latter will seek to use the full com-
bined force of both monetary and fiscal levers, with
the aim of reducing the growth-debilitating inequali-
ties that have emerged as a direct result of neolib-
eral policies. The end game is reflation – and no, we
are not there yet, despite what the current inflation-
ary episode, on its surface, might suggest. The ex-
traordinary nature of the Covid-19 recession and
pandemic-induced policy response has affected sup-
ply and demand in a way that makes it very difficult
to separate temporary from more persistent infla-
tionary forces.
We believe that supply bottlenecks, which play a
large role in the recent high-inflation readings, are a
temporary phenomenon. While there is a trend to-
ward the onshoring of production, global supply
chains remain as intertwined as before, and a major
1
MMT = Modern Monetary Theory
4
dislocation would entail a huge loss for everyone, in-
cluding the biggest players, the US and China.
Globalisation, a staple of the neoliberal era and a
major contributor to the rise of inequalities in devel-
oped countries, is slowing but not reversing. The
same transitory argument can be applied to the de-
mand side of the equation, which has seen a surge
following unprecedented government support to
households in the US. That support is fading, and we
do not see radical MMT 1-style policies being imple-
mented before the next US recession. Labour mar-
ket imbalances, which are, in fact, mostly confined to
pandemic-sensitive sectors, will also subside as gov-
ernment support dries up. Moreover, their inflation-
ary impact, if any, was compensated for by the tre-
mendous surge in productivity that followed this
downturn. In fact, we believe that this productivity
boom will be a longer-lasting disinflationary factor.
One of its main drivers is the energy transition. Re-
cent energy shortages have opened the prospect of
higher fossil-fuel prices, as the world struggles to
shift to renewables. We see this as a bump in the
road (part of the inevitable transitory risks to the en-
ergy revolution), which, from a secular perspective,
will indeed tend to increase productivity and depress
prices. More generally, widespread technological
disruptions – be it in the energy, healthcare, or any
other economic sector – will continue to exert a dis-
inflationary force on the economy.
What other aspects have we factored into our infla-
tion versus deflation analysis? First, slowing de-
mographics, particularly the ageing population in
China, are hard to ignore. Up until now, given its role
as the ‘factory of the world’, China has been an ex-
porter of deflation. With an older population base
and decreased labour supply, which would increase
wages, this trend might reverse. That said, reduced
demand effects due to the usually lower consump-
tion of retirees might actually work in the opposite
direction, not dissimilar to the Japanese experience.
 SE C ULAR O UTLOOK 2020–2029, Y EAR I II
At best, evidence on the effects of ageing de-
mographics on inflation is mixed. Another major
topic is that of debt. The world is inundated with
debt, which is a consequence of rapid financialisa-
tion – another piece of the neoliberal puzzle. In the
West, debt has been a weight on consumption over
the past decade, as private-sector agents have cho-
sen to repair their balance sheets. This behaviour
was once again observed in the aftermath of the
pandemic outbreak. Moreover, today, financial as-
sets represent over six times global gross domestic
product, and turmoil on markets could trigger a
wealth effect so severe that it may take the real
economy down as well – what we call ‘the tail is wag-
ging the dog’. Can nominal interest rates, following
inflation, truly rise without triggering a major down-
turn? Most likely not. Throughout the current dec-
ade, these structural forces will continue to push and
pull, guiding the bottoming process of inflation and
interest rates. In the long term, we indeed believe
that developed economies will reflate through the
use of unorthodox macroeconomic policies – includ-
ing central bank deficit financing or negative taxa-
tion – crucially unlocking the demand of the lower
deciles of household income distribution.
The inflation debate was not the only major talking
point at this year’s offsite. China has received much
attention following its pivot towards the ‘common
prosperity’ objective. We will explain why we have
chosen to keep China as a stand-alone core asset
class despite increased regulatory risks. Climate-
change risks and ESG investing 2 have also become
more prominent topics, constituting an increasingly
integral part of the investment process.
2
Investments that consider environmental, social, and governance criteria
5
It is notable that many of the key Secular Outlook
themes from the past few years have accelerated in
the wake of the global pandemic. The rise in fiscal
activism, the growing rift between China and the
US, as well as the rapid deployment and widespread
use of the mRNA technology in the fight against
Covid-19 have given us a glimpse of what the world
might look like in a decade’s time. A major trend
that has become more salient, which we have in-
cluded for the first time in this edition, is the block-
chain technology and the rise of crypto assets. The
blockchain revolution will have deep consequences,
and it will most likely not only disrupt financial ser-
vices but also propagate across all sectors of the
economy as businesses rely more and more on tech-
nology. We are entering a new era of ‘Web 3.0’, the
third internet revolution, where we will see the emer-
gence of the decentralised internet thanks to block-
chain technology.
We hope you will enjoy reading this third edition of
our Secular Outlook, and we look forward to hearing
your thoughts on it.
Yours faithfully,
Yves Bonzon
Group Chief Investment Officer
Member of the Executive Boards
 SE C ULAR O UTLOOK 2020–2029, Y EAR I II

KEY SECULAR TRENDS

MACROECONOMY CAPITAL MARKETS RISK FACTORS
• Bipolar Sino-US world • End of the US-dollar regime al- • Climate change
• Unorthodox macroeconomic ternation • Rise in cyber risk
policies (MMT, etc.) • ESG • Infrastructure risk
• Energy transition • The rise of political triggers and • Sino-US decoupling
• Web 3.0 the decline of market signals • Dormant systemic risk
• Life science disruptions • Public equities challenge me-
dian private equity returns
• China’s rise to core asset class
status

CHART 1: EVERY DECADE IS CHARACTERISED BY A DIFFERENT ECONOMIC AND INVESTMENT ENVIRONMENT

Source: Julius Baer

Bretton Woods was established in 1944 and became fully functional in 1958; the Berlin Wall fell in November 1989; the European
monetary union refers to the launch of the euro; 60/40 = 60% equities/40% bonds; FAANMGs: Facebook, Apple, Amazon, Netflix,
Microsoft, Alphabet’s Google; MMT = Modern Monetary Theory; TechCare = combination of technology and healthcare; Web 3.0 =
the third internet revolution led by the proliferation of decentralised networks using blockchain technology; ESG = environmental,
governance, and social factors. * Investments in digital assets are exposed to elevated risk of fraud and loss and to price fluctuations.

6
 SE C ULAR O UTLOOK 2020–2029, Y EAR I II
KEY MACROECONOMIC TRENDS
BIPOLAR SINO-US WORLD
Despite the change in the White House occupant
and the disappearance of ‘Trade War’ headlines, not
much has changed in the trend of increasing hostili-
ties between the US and Chinese governments.
While the rhetoric has become more traditionally
diplomatic, you do not need to read between the
lines to notice the increased confrontation on eco-
nomic, geopolitical, and technological fronts. The
concept of a ‘westernisation’ of China has definitely
been buried. The Chinese Communist Party has
shifted its policies towards ‘common prosperity’,
which includes cracking down on its domestic con-
sumer platforms and gearing the economy towards
more strategic sectors, such as artificial intelligence
and semiconductors. The government is (re-)taking
full ownership of its private sector and, importantly,
its data, which is a matter of national security for the
US. Meanwhile, US authorities have expanded the
ban on the acquisition and trading of several pub-
licly listed Chinese companies. Military provocations
have also increased. For example, China is ramping
up both its nuclear and cyber-offensive capabilities.
Also, just in the month of October, Chinese aero-
planes entered Taiwan’s airspace over 250 times.
We see these tensions eventually giving rise to a bi-
polar world in which US and Chinese technology, fi-
nancial markets, and economies function separately
– or at least with a much higher degree of independ-
ence than today. However, we do not believe that
we will witness the dismantling of global trade. At
best, the two countries will gradually work towards
onshoring important businesses that were once de-
pendent on trade with the other country (e.g. semi-
conductor production). The consequence for inves-
tors will be the revival of the benefits of international
diversification in portfolios, which were previously
dampened by globalisation.
UNORTHODOX MACROECONOMIC
POLICIES
The move from the neoliberal era to state-
sponsored capitalism, which is characterised by un-
orthodox macroeconomic policies, is a direct re-
sponse to two elements: the rise of inequalities and
the ineffectiveness of ‘orthodox’ policies in advanced
economies. As the world globalised, Western work-
7
ers found themselves competing with an increas-
ingly skilled and cheap foreign workforce, while fi-
nancial markets were growing. The result was that
much of the benefits of neoliberal policies accrued
to capital rather than to labour and thus dispropor-
tionally benefited the richest strata of the popula-
tion. Inequality measures have thus worsened across
the board. The consequences go beyond the fact
that societal equity principles have been violated –
inequalities are a major hindrance to sustainable
growth. By constraining the spending capabilities of
the lower-income households, neoliberal policies es-
sentially hold hostage the consumption potential of
those with the highest propensity to consume.
The second push for unorthodox macroeconomic
policies has come from the inability of the ‘tradi-
tional’ policy mix, which relies almost exclusively on
monetary policy, to stimulate growth. Not only have
monetary authorities been unable to meet their in-
flation targets since the Great Financial Crisis, but
also the recovery since that time has been the weak-
est in history. With policy rates stuck at low levels,
the monetary stimulus capabilities are little to non-
existent. Besides, with the private sector in these
economies refusing to borrow, the only benefit of
monetary policy today is to ensure stability on finan-
cial markets (see our Asset Allocation Perspectives
publication from October 2021).
Fiscal deficits are only inflationary
when the economy’s productive
capacities are fully utilised.
So what exactly are these unorthodox macroeco-
nomic policies? Instead of minimising the im-
portance of government debt and deficits as neolib-
eral policies do, they represent a range of monetary
and fiscal policies that employ both monetary and
fiscal levers to manage the economy and actively re-
distribute its resources on a large scale. Existing ex-
amples are a universal minimum income or govern-
ment transfers, such as those that we have seen dur-
ing the pandemic. However, the extent of the use of
fiscal policy and its fusion with monetary policy will
become much greater in the future, as theories like
 SE C ULAR O UTLOOK 2020–2029, Y EAR I II
MMT (which highlights the absence of a direct
causal relation between budget deficits, ‘money
printing’, and inflation) take hold. Indeed, fiscal defi-
cits are only inflationary when the economy’s pro-
ductive capacities are fully utilised. Future policies
could include the introduction of negative tax sys-
tems, where lower-income households receive a tax
credit greater than their tax burden (thereby in-
creasing their overall income), while wealthier
households receive the same amount (thereby
slightly decreasing their tax bill). Some proponents
suggest creating a fiscal facility at a central bank
that economists could manage according to the cy-
cle and the government could employ accordingly.
As Western economies are following in China’s foot-
steps with the development of their own central
bank digital currencies (CBDCs), liquidity could be
directly deposited into consumers’ e-currency ac-
counts. The policy response to the pandemic might
be seen as a sign that we have crossed the unortho-
dox policy line. We do not see it that way. Western
economies, to varying degrees, are still tied to their
neoliberal beliefs regarding fiscal deficits. In the US,
government transfers are already back at pre-pan-
demic levels, and new fiscal packages are tightly
scrutinized for their budgetary impact. Most proba-
bly, we will need to wait for the next US economic
downturn to see fiscal measures become truly main-
stream.
CHART 2: STRUCTURAL FORCES BEHIND INFLATION
Source: Julius Baer
8
The set and mix of policies chosen by each country
is key to determining whether reflation will prove
successful. Redistributive policies could quickly
prove to be self-defeating if they end up suppress-
ing business incentives. The key is to go ‘big govern-
ment’ on the macroeconomic side and ‘small gov-
ernment’ on the microeconomic end, i.e. keeping a
competitive and open business environment to pro-
mote innovation while addressing the private-sector
demand deficit.
ENERGY TRANSITION
The world has embarked on a major shift towards
net-zero carbon emissions. Therefore, the needed
energy transition is in full swing. The ‘electrification
of everything’ has started, where new technologies
are satisfying our growing energy needs and reduc-
ing our dependency on fossil fuels. Even China, one
of the biggest energy importers of the last few years,
is moving away from fossil fuels and investing heav-
ily into renewables. This global shift is not going to
be a smooth journey, and the first bumps in the road
were already noticeable this autumn. Decreasing in-
vestments into fossil fuels, coupled with economic
reopening effects, as well as some ill-timed political
decisions, have led to supply-chain disruptions, en-
ergy shortages, and soaring prices. This shows that
the world is struggling to shift to renewables at this
fast pace and that the swift energy transition can act
as an inflationary force in the short term. In the long
 SE C ULAR O UTLOOK 2020–2029, Y EAR I II
term, on the other hand, we believe that technologi-
cal advancements in this space will increase produc-
tivity enough in order to act rather disinflationary.
The adoption of clean energy sources in society is
well underway. For example, plug-in cars are about
to become the most convenient and cost-competi-
tive choice for most users. This means that there is
enough capital and enough demand for renewable
energy sources, but a faster roll-out is prevented by
lengthy permit rules or other politically induced bar-
riers. It is clear that the transition away from fossil
fuels towards cleaner energy sources will take more
time and require great efforts from both govern-
ments and corporations, but we believe that it is an
inevitable development that will be successfully im-
plemented in the long run, despite some noise and
market disturbances in the short run.
WEB 3.0
The ‘currency’ narrative has really done a disservice
to the emerging digital asset class. It is clearer today
that the focus on the volatility of digital coins and
related operational issues, including energy costs,
will prove to be a distraction in the grand scheme of
things. Digital assets and the decentralised systems
that they are built on (based on blockchain technol-
ogy) will be the foundations for the next digital and
internet revolution.
One of the prospects of digital asset disruption that
stands out is the digitalisation of trust, ensured by
CHART 3: DECENTRALISED FINANCE PLATFORMS GAIN IMPORTANCE
7%
6%
Ethereum is the
5% leading platform
for smart con-
4%
tracts
3%
2%
1%
0%
Sep 18 Mar 19 Sep 19
Ethereum locked in decentalised finance as % of Ethereum market capitalisation
Source: Coinmetrics, DeFi Pulse, Julius Baer
the encrypted, non-corruptible nature of the block-
chain. The possible cost and efficiency gains from
digital ‘smart’ contracts could revolutionise the con-
duct of business as we know it. It will have tremen-
dous consequences on financial markets, with De-
centralised Finance (DeFi) protocols permitting fi-
nancial transactions, lending, and trading without
the intervention of a centralised player. The private
investment space could be substantially trans-
formed, as private investments become more liquid
and the line between private and public markets be-
comes blurred. Ownership and the transfer of other
illiquid assets, such as real estate or art, could be
simplified and made more secure and verifiable
through the use of non-fungible tokens. One of the
most fascinating aspects of Web 3.0 is that it might
displace the winners of the last decade, i.e. social
media and web platforms, whom we have come to
know as the tech giants. Internet users will no longer
have to rely on big players to share their content and
build their businesses. Instead, they will be able to
manage, contribute to, and curate decentralised
platforms themselves, and the whole process can be
incentivised by some mechanism of earning digital
tokens. Moreover, blockchain could help to solve the
data-privacy issues created by social media plat-
forms by giving ownership back to the data subject.
From a portfolio perspective, predicting how digital
assets will affect the risk/return profile is not
straightforward – return and volatility history is most
Mar 20 Sep 20 Mar 21 Sep 21
9
 SE C ULAR O UTLOOK 2020–2029, Y EAR I II
likely too short to shape a well-informed guess. The
real question is what the underlying reason is for
adding such exposure to a portfolio. When it comes
to bitcoin 3, one may conceive it as digital gold, even
though, for the time being, it has behaved more like
equities than safe-haven assets. Nonetheless, if
adopted, bitcoin could become the staple ‘real’ asset
of a generation. More importantly, investing into
digital assets could be compared to buying an op-
tion, with the disruptive force of the blockchain
technology acting like the underlying asset of the
option. Investing in the digital coins and tokens that
underpin the functioning of decentralised applica-
tions and in companies that are participating in the
build-up of the blockchain ecosystem are good ways
to gain exposure.
One of the prospects of digital
asset disruption that stands out is
the digitalisation of trust.
The path to Web 3.0 will not be a smooth one, how-
ever, and it is likely that we will see many players in
the space disappear before true leadership emerges.
One important aspect of it is regulation. China has
straight out banned the use of crypto assets in its ef-
forts to maintain a monopoly over money issuance
and to keep control over both the centralised and
decentralised economy. Western governments are
also unlikely to let a decentralised financial system
run unchecked. Another major concern today is that
of security. While blockchains are inviolable by de-
sign and provide some degree of privacy, if one loses
the private key to his crypto-wallet, that value is def-
initely lost forever. Moreover, smart contracts are
subject to vulnerabilities and bugs that, due to their
nature, are much harder to correct than traditional
computer programmes. These elements are bound
to play a big role in the success, degree, and speed
of adoption, and investors ought to be aware of
them.
3
Investments in digital assets are exposed to elevated risk of fraud and loss and to price fluctuations.
10
LIFE SCIENCE DISRUPTIONS
The outbreak of the Covid-19 pandemic has clearly
shown the weakness of the entire healthcare value
chain, from citizens to international health institu-
tions. However, the pandemic is not the main driver
of the highlighted need to improve the current
healthcare system; it has merely acted as the accel-
erator of an already ongoing development. Momen-
tous demographic shifts around the world, the emer-
gence of chronic diseases associated with ageing,
and ever-
growing medical costs are strong tailwinds that are
likely to create further upside potential for areas re-
lated to digital health, genomics, and extended lon-
gevity in the long term. The greater adoption of dig-
ital-health technologies and other innovative solu-
tions, such as gene-based therapies, could
strengthen our resilience for present as well as fu-
ture health threats and ease the pressure on current
healthcare systems. China is likely to continue to
catch up with Western nations in healthcare innova-
tion, especially under the notion of ‘common pros-
perity’, in which affordable access to high-quality
healthcare is seen as a top priority.
The key aspect of such disruptions in the life-science
space is the more general proliferation of data. Go-
ing beyond digital healthcare, life sciences will be-
come more and more similar to information technol-
ogy, as molecules and compounds are created artifi-
cially and personalised using artificial intelligence,
robotics, and nanotechnology. This trend is part of
the ‘everything tech’ theme that we are seeing
emerge, as every industry, from biotech to manufac-
turing to energy, is moving to become a technology
business.
 SE C ULAR O UTLOOK 2020–2029, Y EAR I II

KEY CAPITAL MARKET TRENDS

END OF THE US-DOLLAR REGIME come. These growing environmental and social ten-
ALTERNATION sions mean that corporations need to redefine their
Since the end of the Bretton Woods monetary sys-tem purpose and should take into account not just share-
in the early 1970s and the start of floating ex- holder value but also their impact on all stakeholders,
change rates, we have experienced five decades of including workers, suppliers, communities, and society
successive US-dollar secular bear and bull cycles. at large. The notion that incorporating ESG criteria
Consequently, understanding the implications of the into the investment process makes investments less
US-dollar regime has actually been the most im- profitable is disappearing, which supports the move
portant asset allocation input. During secular US- towards an environmentally friendly stakeholder
dollar bull markets, US assets have outperformed the economy. Additionally, a growing part of the popula-
rest of the world, and during secular bear trends, the tion increasingly cares about the impact that their
rest of the world has outperformed US assets. Since money has on the environment and society, which
2011, we have been experiencing a US-dollar secular emphasises the importance of personal, value-based
bull market again. This sequence has been driven by investing. We consider it to be of utmost importance
the unique status that the greenback en-joys as the that financial institutions take into account their cli-
world’s main reserve currency. Most of the global ents’ individual preferences, especially because the
trade in goods and services was, and still is to a large underlying terms behind ESG criteria can be very
but declining extent, conducted in US dollars. subjective, and every individual has his/her own inter-
pretation of what is defined as sustainable. Incorpo-
Today, the rise of China is changing this dynamic in rating ESG criteria into the investment process can-
multiple ways. China is intent on breaking free from the not follow a ‘one-size-fits-all’ approach but rather
dollar-dominated system and establishing the must be subject to the personal preferences of the in-
(e-)CNY as a stable global reserve currency. Further- dividual investor through personalised portfolios.
more, the US is moving towards MMT-inspired mac- While it is clear that finance will play an important
roeconomic policies, where recurring public deficits part in a sustainable future, one has to be mindful
are monetised by the central bank to a very signifi-cant that finance is not the ultimate solution and cannot
extent. Yet nowadays, all major advanced econo-mies do it alone. Governments, corporations, and individu-
are doing the exact same thing to various de-grees. als have to work together towards this common goal
Accordingly, the US dollar is not debased against other and take responsibility for driving this much-needed
paper currencies but rather against real assets: transition.
equities, gold, and real estate, in that order.

ESG
Incorporating ESG criteria into the
Environmental, social, and governance (ESG) criteria investment process cannot follow
have been the buzzwords of the last few years and will a ‘one-size-fits-all’ approach.
continue to be one of the most important trends to
follow in this ongoing decade. The United Nations
Climate Change Conference (COP26) that was held
THE RISE OF POLITICAL TRIGGERS AND THE
in November has underlined the important role that
DECLINE OF MARKET SIGNALS
the corporate sector, in general, and the financial sec-
As the pandemic has demonstrated, the impact of
tor, specifically, play in decreasing the world’s envi-
external forces on market outcomes is becoming
ronmental footprint. At the same time, we have seen
more prominent. Governmental responses were key
that the benefits of extreme financialisation and glob-
for determining the extent and speed of the pan-
alisation have not been equally distributed across all
demic recession and recovery, and inflationary out-
social and economic groups, leading to a soaring in-
comes have proved to be the strongest where fiscal
crease in inequality related to both wealth and in-
stimulus was more generous. Central banks control
an increasing part of financial markets and are

11
 SE C ULAR O UTLOOK 2020–2029, Y EAR I II

therefore distorting the cost of capital and control-
ling the level of asset prices to an extent never seen
before. At the same time, geopolitical risk has drasti-
cally increased, resulting in the gradual overshadow-
ing of traditional market signals and increasing mar-
ket volatility and noise in the short term. This phe-
nomenon has been reinforced by the prominence of
algorithmic and systematic trading.
In this environment, market timing – which has been
a poor risk/reward strategy anyway – is becoming
even worse, as tactical moves become riskier and
harder to implement profitably. As a result, the ben-
efits of sticking to a robust strategic asset allocation
that is tilted towards strong structural trends have
increased. In this context, the Julius Baer Investment
Approach, which is framed around four regimes (Ex-
pansion, External Shock, Systemic Issue, and Eco-
nomic Contraction), provides a useful template that
enables investors to de-risk portfolios if need be.
PUBLIC EQUITIES CHALLENGE MEDIAN
PRIVATE EQUITY RETURNS
Private markets have grown substantially in the past
decade. The aversion to mark-to-market volatility
and the low-yield environment have been among
the major drivers of this trend. Private equity mar-
kets have increased by a factor of 12.6 in the last 20
years, while global public-market capitalisation has
‘only’ multiplied by 3.7. Though it is not straightfor-
ward to compare public and private market returns,
the most prominent estimates suggest that average
US private equity returns have been largely in line
with public stock performance over the past 15
years. ‘Average’ is the key word here, as there is sub-
stantial performance dispersion between managers,
i.e. alpha (outperformance over public markets) is
concentrated in the top quartile, while the bottom
25% of the managers made zero to negative returns.
Going forward, it will be even more challenging to
beat public markets. The average long-term perfor-
mance of private equity has been trending down for
two decades, and with the market continuing to at-
tract investor attention, it is becoming even harder
to get access to top managers. Thus, the illiquidity
premium is morphing into a liquidity premium, and
manager selection will become even more crucial
than before.
At the same time, public markets are continuing on
their trend of de-equitisation, i.e a decrease in the
total number of shares publicly traded. Europe and
Japan have been lagging the US in this matter but
are now catching up. Although special purpose ac-
quisition companies (SPACs) have proved very pop-
ular during the ongoing pandemic, it remains to be
seen whether the trend is sustainable. While, theo-
retically, SPACs make it easier for private compa-
nies to go public, since their regulatory implications
are lighter than those of a traditional initial public
offering (IPO), their return profile might be less at-
tractive to investors, since most of the proceeds go
to the deal sponsors. On the other hand, the number
of traditional US IPOs has been trending down, and
the time that companies take to go public has
lengthened. Established listed companies have con-
tinued to ramp up share buy-back programmes. In
2021 so far, total buy-back commitments in the US
have exceeded their previous 2018 peak, surpassing

CHART 4: PRIVATE EQUITY ASSETS UNDER MANAGEMENT AND GLOBAL PUBLIC-MARKET CAPITALISATION

% Index, 31.12.2000 = 100

6 1500

4 1000

2 500

0 0
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
Private equity as a share of public markets (l.h.s.)
Private equity assets under management index (r.h.s.)
Global market capitalisation index (r.h.s.)

Source: World Bank, Bloomberg Finance L.P., Preqin, Bain and Co., Julius Baer.
Preqin estimates and projections are used for 2020 and 2021 private equity figures.

12
 SE C ULAR O UTLOOK 2020–2029, Y EAR I II
USD 1 trillion in November. This is likely to continue
to sustain public equity returns going forward.
CHINA’S RISE TO CORE ASSET CLASS STATUS
2021 has been a momentous year for our strategic
call on China. Back in 2017, we introduced the
theme of Chinese assets ascending to a stand-alone
core asset class and assigned a 5% strategic alloca-
tion to Chinese equities, which constituted the en-
tirety of our strategic allocation to emerging equi-
ties. The thought process behind the decision was
clear: if the two major sources of global growth were
technology and emerging markets, China was the
only place where the two growth engines converged.
Excluding China’s contribution to the gross domes-
tic product (GDP) of emerging countries, the aver-
age growth of countries represented in the MSCI
emerging markets index over the last decade would
have been 2.5% lower. At the same time, unlike any
other advanced or emerging economy, China has
become a cradle for innovative companies that have
the potential to rival US peers. The country’s invest-
ment in research and development (R&D) is among
the highest in the world, contributing to almost a
third of global R&D spending since it entered the
World Trade Organisation (WTO) in 2001. Further-
more, its population has become increasingly edu-
cated, most crucially in scientific fields that are fun-
damental for driving technological advancements.
As China’s financial markets opened, they grew to
the size and importance of European and US mar-
kets and were thus included more prominently in
flagship indices. Taking these factors into account,
we predicted that China’s leading technology com-
panies, the BATs (Baidu, Alibaba, and Tencent),
would rise to the heights of their US counterparts,
the FAANMGs (Facebook, Amazon, Apple, Netflix,
Microsoft, and Alphabet’s Google).
However, this narrative started to break down in late
2020, when the government pulled back the IPO of
the country’s largest FinTech company at the last
minute, halting in its tracks what would have been
the most lucrative IPO in history. Back then, the at-
tention seemed to be directed rather specifically at a
prominent entrepreneurial figure and was thus con-
tained. As months passed by, though, the authorities
4
60% equities/40% bonds
13
did not back down, and the pushback against mo-
nopolistic behaviour strengthened. After straight
out banning one of its most successful ride-hailing
apps following its US IPO, due to data-security con-
cerns, the final straw fell in late July when private
education platforms were forced to go non-profit.
Regulations on gaming and online insurance compa-
nies, as well as the broader internet sector, soon fol-
lowed, for they were all deemed in some way as
harmful and a distraction from the country’s strate-
gic goals. There was no doubt at that point that
China will not let capital grow exponentially within
its borders. Giant technology companies are
deemed as a menace to the government’s power
and thus a danger to the country’s economic and
political stability, which is its number one priority.
Even more crucially, Xi Jinping has shifted the Chi-
nese Communist Party’s strategic focus towards
‘common prosperity’, vying to decrease the income
and wealth inequalities that grew while the Chinese
economy soared.
China will not let capital
grow exponentially within
its borders.
At this point, investors are faced with a difficult de-
cision. China’s tightening regulatory fist means that
the value, not just the valuation, of Chinese equity
markets has been impaired. Does that mean that our
strategic case for the asset class is dead? For now,
we do not think so. We believe the Chinese 60/40 4
portfolio will still be a strong contender during this
decade – with emphasis on the 40. Moreover, the
diversification benefits that both Chinese equities
and bonds bring remain strong in a world that is be-
coming bipolar.
Regarding equities, while the investment case for
the country’s technology giants has most likely
weakened, there is potential in many other sectors
that are better aligned with the government’s strat-
egy. The move to transition the country’s economy
to clean-energy sources will benefit both electric-ve-
hicle and other cleantech companies for years to
come. Semiconductors should also be supported, as
onshoring efforts continue, while biotech and digital
 SE C ULAR O UTLOOK 2020–2029, Y EAR I II
healthcare will be spurred by efforts to ensure af-
fordable healthcare for all. Exposure to innovative
onshore-listed companies thus remains attractive.
Moreover, we see deleveraging efforts and the un-
winding of the property sector, which is actually the
world’s largest asset class and accounts for one third
of China’s GDP, as tailwinds for domestic equities if
Chinese households shift their savings from real es-
tate to the stock market. To reflect the new outlook,
we decided to slightly adjust our allocation to Chi-
nese equities. In order to increase our onshore expo-
sure, we switched our strategic position, which in-
cluded a mix of both China onshore and offshore
companies, to a mix of 2.5% China onshore and
2.5% Asian equities excluding Japan.
We remain positive on Chinese bonds and other
yield-generating instruments, excluding real estate.
We have named the new Chinese model ‘Yangtze
capitalism’, where, similar to its German predecessor
‘Rhenan capitalism’, the upper echelon of the com-
CHART 5: CHINA’S WORKING-AGE POPULATION IS SHRINKING
Working age population ratio (15-64 years), %
75
70
65
60
55
50
1950 1960 1970 1980
UN projections China
Source: Refinitiv, United Nations, Julius Baer
pany’s balance-sheet structure (i.e. credit) is fa-
voured over capital, resulting in a lower realised eq-
uity risk premium. Chinese government bonds de-
nominated in renminbi, which have been among the
best-performing fixed income instruments this year,
constitute a particularly attractive asset class, both
for yield and diversification purposes. Unlike all
other major economies, China remains, quite para-
doxically, the only one still practising conventional
macroeconomic policies and not engaging in finan-
cial repression. This bodes well for nominal renminbi
rates and the stability of the CNY. Add to that the
government’s clear focus on the currency’s ascent to
reserve currency status and you have quite a favour-
able mix. In terms of asset allocation, we are refrain-
ing from adding renminbi bonds directly to the stra-
tegic portfolios of USD, EUR, CHF, and GBP inves-
tors, as we believe that, for portfolio construction
purposes, the fixed income bucket should not bear a
high currency risk, and that hedging costs could
carry quite a burden over the long-term horizon.
1990 2000 2010 2020 2030 2040
India Japan Advanced economies
14
 SE C ULAR O UTLOOK 2020–2029, Y EAR I II
KEY RISK FACTORS
CLIMATE CHANGE
As global temperatures continue to register new
records and the frequency of extreme weather
events increases, the physical risks of climate change
are becoming clearer by the day. From rising sea levels
to desertification and the displacement of both hu-
mans and wildlife, the consequences, if not mitigated,
will be far and wide. These could, in turn, lead to the
substantial destruction of productive assets and a
slowdown in economic growth in the most affected ar-
eas. In order to limit the negative effects of climate
change, the world once again gathered to coordinate
climate-response efforts at this year’s COP26 confer-
ence in Glasgow. While the convention proved fruitful
in terms of exchanging knowledge about promising,
business-driven solutions, a meaningful and binding
agreement that could significantly change the current
path to net zero was lacking. This again reminds us
that politics have their limits in being able to bring
about collective climate action, which is crucial when it
comes to determining the outcome of the fight
against climate change. The uncertainty is palpable
and will continue to affect the investment environ-
ment as we move towards the goal of achieving car-
bon neutrality.
Furthermore, transition risk has become even more
prominent, as a series of energy shortages, combined
with the extraordinary post-pandemic economic envi-
ronment, have caused fossil fuel prices to skyrocket to
multi-year highs. This has stoked fears that, given their
ambition to go green, countries have underinvested in
traditional sources of energy, such oil, coal, and natural
gas, which the world continues to heavily rely on,
thereby rendering them vulnerable to such episodes.
These kinds of hiccups could occur in the years to
come as well, prompting occasional spikes in inflation.
At the end of the day, however, clean energy is past
the point of economic disadvantage, and the energy
transition is well underway.
RISE IN CYBER RISK
Cyberattackers are becoming evermore sophisticated,
and cyber-criminality and ransomware will continue to
pose an increasing threat to businesses and individuals
in the future. This forces cybersecurity companies, for
their part, to play a constant game of catch-up. Mean-
15
while, data security has taken the front seat in geopo-
litical struggles, pushing countries not only to ramp up
security efforts but also to onshore strategically sensi-
tive industries, such as computer chips and internet in-
frastructure. However, the extent and scale of cyber
risk is becoming even greater, as hackers, sometimes
government-sponsored ones, move their eyes to big-
ger targets, such as government facilities and supply
networks. The coronavirus crisis has demonstrated the
vulnerability of countries when they are forced to shut
down parts of their economy. Even though the sectors
most affected by Covid-19 are not the main contribu-
tors to GDP growth, the global economy has experi-
enced one of its most severe downturns ever. The af-
ter-crisis effects of supply bottlenecks and inflation
continue to linger. In an increasingly digitalised and
connected world, this crisis provides some perspective
on the possibility of a broad-based cyberattack that
could incapacitate an even larger section of the econ-
omy and lead to a dramatic contraction in economic
activity.
INFRASTRUCTURE RISK
Infrastructure risk lies at the crossroads between cli-
mate change and cyber risk. Rising sea levels and ex-
treme weather events, such as intense storms or heat-
waves, could cause substantial damage to the re-
sources that are essential to human activity. Mean-
while, the reliance of modern infrastructure on tech-
nology makes it a prime target for cyberattacks. The
Colonial Pipeline ransomware attack back in May
2021 threatened the fuel supply of a large part of the
United States. These developments prompt govern-
ments to accelerate their efforts against both global
warming and cyberwarfare and also push infrastruc-
ture projects to become resilient in the face of such
threats.
SINO-US DECOUPLING
The emergence of a bipolar Sino-US world will not
be a smooth ride. With every new trade-war devel-
opment and military escalation, the prospects for
the economic cycle and global financial markets will
be challenged. Taiwan remains a wild card in that re-
spect; experts disagree on the likelihood that China
will move to take over the island. Some posit that
the ideological environment in China is very favour-
able of such a move, while others believe that their
 SE C ULAR O UTLOOK 2020–2029, Y EAR I II
economic and military constraints will prevent them
from going beyond provocation. In any case, Taiwan
will remain the cloud that hangs over the process of
‘peaceful’ decoupling. Another important source of
risk that must be considered is the actual disentan-
gling process of the countries’ supply chains and
technological ecosystems. The Covid-19 crisis has
once again shown how even temporary bottlenecks
can cause much disarray. Even though we believe
that the process should proceed gradually, other
supply-shortage episodes might come down the
road.
DORMANT SYSTEMIC RISK
We continuously monitor key systemic risk indicators
to assess whether any systemic issues pose a threat to
the economic cycle and the overall outlook. The Chi-
nese property sector debacle, due to the sheer size of
the asset class, came onto our systemic risk radar in
2021, as Chinese regulators made it clear that they will
not make it easy for overindebted real estate develop-
ers that are under funding stress. Nevertheless, in re-
16
action to the quickly widening credit spreads, policy-
makers have eased market conditions somewhat, a
sign that they are ready to keep the economic fallout
contained, regardless of the fact that they are still re-
solved to ultimately deleverage the sector. Meanwhile,
house prices in developed economies have risen at a
similar pace as the rest of the financial market. In the
US, the rise has been comparable to price increases
prior to the Great Financial Crisis. Nevertheless, we do
not see that as a source of systemic risk, as funding
conditions are loose, while lending standards and
household credit quality have dramatically improved
over the past decade. If anything, it presents more of
an inflationary risk, as housing and rents represent a
large component of price indices. We have not identi-
fied any other major imbalances in developed econo-
mies that could trigger a rise in systemic risk. Central
banks are committed to ensuring financial stability
and containing any systemic issues that threaten the
real economy. Therefore, the indicators of systemic
risk remain subdued.
 I M P O RTAN T LE GAL I NFORMATION

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Authors
Yves Bonzon, Group Chief Investment Officer, yves.bonzon@juliusbaer.com 1)
Olga Mian, CIO Strategy and Investment Analysis, olga.mian@juliusbaer.com 1)
Nicolas Jordan, CIO Strategy and Investment Analysis, nicolas.jordan@juliusbaer.com 1)
1) This author is employed by Bank ­Julius ­Baer & Co. Ltd., Zurich, which is authorised and regulated
by the Swiss Financial Market Supervisory Authority (FINMA).

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© Julius Baer Group, 2021

21
I M P O RTAN T LE GAL I NFORMATION

NOTES

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I M P O RTAN T LE GAL I NFORMATION

NOTES

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 JULIUS BAER GROUP

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12/2021 Publ. No. PU00960EN

© JULIUS BAER GROUP, 2021