Keys to building a 10-year portfolio

There is a rule of thumb that investors will carve in stone if they can, and it can be summed up in one word: diversification. Managers repeat over and over again their recommendation to bet on a global portfolio, but above all that includes different assets. This saying has always guided savers, and more so during the frantic dance of the markets in the past three years.

With an epidemic crippling the world, an unexpected war in Europe, prof Double digit inflation And the tightening monetary policy that ended a decade of negative rates, volatility has become a concern for investors. Despite the unstable geopolitical scenario, analysts expect a return to a new normal, which was marked by the end of the interest rate hike cycle. This new scenario affects not only short-term investments, but also the composition of portfolios for the next decade.

For experts, building a 10-year portfolio ensures some detachment from the current economic cycle. Alejandro Vidal, investment director of Deutsche Bank Spain, points out that investing for the long term does not mean buying assets and leaving them idle for 10 years. “It’s a matter of knowing which part of the portfolio is very likely to be liquidated in 10 years, and so we can adjust the total risk for that period and not based on short-term fluctuations in valuations,” he says. This perspective ensures more stability and better asset selection among trends with some growth potential in the future, but very volatile in the short term.

10 year returns

Asset returns will largely depend on the level of interest rates in the coming years. Analysts agree that the cycle of increases is coming to an end, but they consider that higher rates than in the past have returned to survival and that, depending on macroeconomic developments, the first interest rate cut will not be seen in the United States until 2024, while in Europe they have not yet considered this possibility.

In the face of rising rates that raise expected profitability, fixed income will continue to regain ground, with returns not seen in decades. Almudena Benedit, head of portfolio management at Julius Baer’s Iberia, explains that the Swiss firm is calculating that investment-grade corporate bonds will reward savers at 5%, while the Public debt Within five years it will guarantee returns of 3.8%. On the other hand, US stocks, from the EAFE (Advanced Markets Index excluding the United States and Canada) and global, will achieve a return of 7.8%, surpassing the Asian stock exchange, excluding Japan, with a return of 8%. The expected return for the money market will be 4%.

And Pictet’s latest report It also signals a return to the prominence of fixed income. In fact, it is estimated that the 10-year nominal annual return on the US stock market will be 6.2%, while the yield on investment-grade US corporate bonds will be 5.4%. In the Eurozone, the stock market forecast return for a decade is 7.2%. It will be the same yield on European high-risk corporate bonds. The yield on investment-grade European corporate debt will be 4.6% per annum. Long-term sovereign bonds from developed markets (excluding Japan) will also remain attractive: US Treasury bonds In 10 years, they will offer a yield of 3.7% in dollars, compared to 2.3% in euros for German bunds.

Building a long-term portfolio

With the resurrection of fixed income, the The traditional portfolio is 60/40Although the analysts consulted reject a dogmatic view of it: Fixed income should matter more than it did in the past, but its weight will depend on the risks one is willing to take. From Julius Baer, they consider this type of wallet more attractive than it was before the pandemic. However, stocks are outperforming gold and fixed income, so it is advisable to pay attention to the development of the markets.

From Deutsche Bank, Vidal asserts that if he were to start from scratch with a portfolio, it would be heavily weighted in fixed income, an opportunity not to be missed. “Long-term inflation expectations can be matched with relatively low-risk debt instruments and highly acceptable terms,” he says.

Pedro del Pozo, Director of Financial Investments at Mutualidad de la Abogacía, defines his long-term portfolio model: “It should mix bonds and illiquid assets, such as venture capital and infrastructure, and high-quality stocks, in the case of an income portfolio, while favoring stocks with dividends.” The expert points out that these assets must have sustainability as a reference to ensure solvency and security.

On the other hand, Pedro Pablo García, Mutuactivos Asset Allocation Manager, stresses that variable income should prevail, given its superior returns and above inflation, although the portfolio should also include fixed income, such as government bonds and financial credit, and alternative assets, which should have a weight between 5% and 10% in the portfolio. “In the past ten years, the annual return of the European Stoxx 600 has been 8.5%, compared to 1.05% for investing in European government bonds or 2.13% corresponding to the annual increase in Spanish inflation in that period,” he comments.

His preference for stocks is based on long-lived sectors, such as infrastructure and energy transition-related companies, with limited exposure to cyclical sectors. They are looking with interest at sectors such as utilities, real estate, photovoltaic and technology. “We see value in companies like Colonial, Grenergy, Solaria, Carl Zeiss, ASML, Cellnex, Nestlé or Adidas,” he explains.

Among the illiquid assets, Miguel Macho, Investment Director of Indosuez Wealth Management, highlights investment capital, for its large long-term returns that reduce the volatility of liquid financial assets. According to the expert, they should account for between 10% and 15% of the portfolio.

Macrotendencias

Sustainability, environment, energy transition, clean energy, technology, automation, infrastructure, lifestyle, health and care. The analysts consulted agree that these are the trends that will determine investment strategies in the next decade. the artificial intelligence (AI) It is the unanimous favorite subject because of its huge potential. Macho highlights that investment trends in the coming decades are closely related to this tool. “Many sectors will benefit from AI, such as health or transportation. It will also play an important role in combating climate change, improving production processes and reducing resource use.”

In this sense, the agricultural sectors Based on Eat smart They will also be fundamental, in a scenario of continuous growth of the world’s population (in 2050 it is expected to exceed 9,000 million people). Technology, in this case, will play an important role in modernizing a region that spends huge amounts of resources. “The global food chain is responsible for 25% of greenhouse gas emissions and agriculture itself consumes 65% of the planet’s fresh water,” Macho highlights.

los demographic factors It also has an important impact on markets and investment. In 2030, it is estimated that 21% of the US population will be over the age of 65, according to a study by the US Census Bureau. Machu points out that population aging necessitates increased spending on health-related products and services, which leads to the strengthening of the health sector and related industries, such as pharmaceuticals or the biotechnology branch.

aging It will also identify new investment trends. Laurent Clavel, head of multi-asset at Axa IM, stresses that European pension systems require fundamental reform because of their questionable long-term sustainability. For this reason, part of the population prefers to worry about their pension on their own, looking for profitable investments. “This means that risky assets will continue to be an essential part of retirement plans,” the expert concludes.

long term risks

economic inflation. Although rising prices are a current problem, experts consider that the battle that central banks engage in in the face of inflation will have clear effects in the long run, as it will determine the health of economies, their level of activity and growth, which until today is still shrouded in uncertainty. They expect Axa investment managers that central banks will meet their targets and that price increases will fluctuate around 2%, both in the US and Europe. In terms of GDP, the Eurozone is expected to grow in the next decade by 1.25% while the United States will grow by 1.75%.

Geopolitics. The consolidation of the Asian giant as a global superpower and its position in the technology sector will have some impact on the markets. However, the geopolitical agenda will continue to be characterized by tension between the United States and China. The North American country continues to demand answers from the Asian giant about unfair trade practices that have led to tariffs on its exports. In fact, Christine Lagarde, the president of the European Central Bank, warned at the Central, Eastern and Southeast European Conference that geopolitical tensions were “weakening global trade”.

technology. The disruptive arrival of artificial intelligence will affect all sectors of the economy and expand investment options. However, analysts warn that it is not without risks and raises a series of ethical issues that must be subject to more demanding controls.

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