Barclays: The major economies around the world are moving along different trajectories. Stocks remain the core of long-term returns.

Barclays' chief global asset allocator Nicolai Vasilyevich (Head of Global Asset Allocation) and Lucas Gerling (Head of Quantitative Macro and Thematic Strategies) stated in a research report that major global economies are developing along different trajectories; the return on government bonds is sufficient to crowd out many other investments, but not all liquidity assets are the same; stocks remain at the core of long-term returns; illiquid alternative investments, especially hedge funds, often thrive in this environment. The bank expects the return rate on Eurozone government bonds and investment grade bonds to be around 5.0% over the next ten years, with the return rate on US and UK bonds between 4.5% and 5.2%. Expectations for high-yield bond returns are only slightly higher by 1% - 1.5%. Barclays' main points are as follows: Financial markets have been turbulent this year, and are unlikely to calm down much in the second half. However, the bank's updated macroeconomic and market long-term assumptions show that long-term returns are minimally affected by short-term noise (no matter how loud it may be). Long-term macroeconomic forecasts (2025 - 2034) 5-year (2025 - 2029) and 10-year (2025 - 2034) expectations for key macroeconomic variables When even the next year is full of uncertainty, how can one make decisions for a 10-year investment? Perhaps the sage wisdom of two investment legends can help address this highly practical problem - these two wise men are Mike Tyson and Warren Buffett. Mike Tyson once said, "Everyone has a plan until they get punched in the face." This was said during an interview before his match with opponent Evander Holyfield. Buffett, a man with a wealth of investment insights, has said, "The stock market is a tool that transfers money from the impatient to the patient." Unlike a boxing match, in the field of investments, short-term uncertainty does not necessarily long-term volatility, as fundamentals will gradually evolve and eventually return to normal from extreme conditions. Reevaluating fundamentals However, as the basis of the bank's forecasts, these views must be updated regularly. From economic growth, labor, capital and productivity factors, to fiscal and monetary policy stances, to bond market structures, and growth and valuation perspectives on stocks and other asset classes, all must be considered. Key points - the following are the key conclusions drawn from the bank's review of long-term assumptions this year: Major global economies are developing along different trajectories The return on government bonds is sufficient to crowd out many other investments, but not all liquidity assets are the same Stocks remain at the core of long-term returns Illiquid alternative investments, especially hedge funds, often thrive in this environment Different stages of the economic cycle The short-term challenges of major global economies are not only different, as described in "Shaken but Not Stirred," but there are also differences in their long-term prospects. The long-term growth potential of the US economy is set at above 2.5% (higher than post-pandemic growth levels), while the long-term potential of the Eurozone is close to 1.5%, significantly lower. The root of these differences between the two economies ultimately lies in population structure and productivity growth. All Eurozone economies face the problem of an expected decrease in the working-age population, which is unlikely to be offset by an increase in labor force participation. It is expected that the United States will adopt new technologies (and more lenient labor laws) faster, leading to a competitive advantage in productivity. China's long-term growth prospects are expected to continue to weaken, currently around 3.5%, while India is still expected to grow at a rate of over 5%, although the growth rate is slowing down. In terms of monetary policy (which determines the return on cash and short-term bonds), the current cycle is nearing its end. The European Central Bank has almost completed raising interest rates and is starting to lower them; the Federal Reserve and the Bank of England are also expected to lower interest rates towards the bank's forecasted slightly below 3% and 3.9% "neutral rate." Combining highly uncertain short-term forecasts with structurally driven long-term forecasts suggests that convergence in the growth paths of developed economies is unlikely, and differences in actual short-term interest rates may become a significant feature of the next decade. Bonds: High yields and narrow spreads Long-term expectations for bond returns are largely determined by yields at the time of forecasting. As long as defaults are avoided, fixed-income instruments can generate returns in the long term. The current yield levels are historically high, reflected in the expected return differentials between government bonds, investment grade bonds, and their respective long-term average levels (see chart below). Credit spreads are currently at historically low levels, increasing the potential for high-risk segments of the fixed-income sector to widen spreads. As a result, the performance of high-yield credit bonds is expected to be lower than the historical average levels since 2005. The bank expects the return rate on Eurozone government bonds and investment grade bonds to be around 5.0% over the next ten years, with the return rate on US and UK bonds between 4.5% and 5.2%. Expectations for high-yield bond returns are only slightly higher by 1% - 1.5%. Stocks: Short-term risks, long-term growth Stocks largely depend on company earnings growth to drive returns, whether these returns are realized within the investment period or require more time to materialize, and stock pricing reflects this. Over the past five years, expected earnings growth has significantly raised valuations, especially in the US market. This year's volatility has caused expectations for future growth to decline, with changes in US trade policy initially triggering market sell-offs. However, valuations look slightly healthier than last year before a similar sharp rebound in valuations; prospects for the long term are less dragged down. Nevertheless, economic improvements are still needed to make stocks not appear overvalued. During the bank's forecast period, actual growth prospects are relatively muted, especially in Europe. Overall, expected returns in developed markets are at or below long-term average levels, varying by region at around 6% - 8%. Therefore, for investors who can overlook short-term fluctuations, stocks should still provide returns higher than cash. Liquidity alternative investments: Driven by cash, inferior to bonds The expected return on commodities is significantly higher at 1.7% than the historical average over the past 20 years. However, in the past five years, the annual return rate on a broad basket of commodities exceeded 11%. These vastly different observations highlight why this asset class is usually only a small part of an investment portfolio: its purpose is to provide the benefits of diversification, especially during times of inflation shocks. Driven by relatively high returns on cash and alternative trading strategies to stocks, liquidity alternative investments are expected to have a return rate of 3.9% over the next 10 years, significantly higher than the long-term average levels. However, compared to government bonds, the returns on these assets themselves may not be as important (government bonds can provide higher risk-adjusted returns and have lower correlation with stocks and high-yield bonds). Illiquid alternative investments: The costs and returns of illiquidity Private markets (including private equity, debt, real estate, and infrastructure) are expected to perform relatively well over the next ten years. The former, especially funds that act as alternatives to stocks and credit bonds in portfolios, often thrive in high rate environments. The bank expects the average return rate for all hedge fund strategies to be around 6.5%. Risk mitigation tools and diversification tools in these assets may be better able to absorb market fluctuations than liquidity alternative investments - this is also due to their design, which is essentially for patient investors. Returns in private markets largely follow the performance of their benchmark assets in public markets and come with a illiquidity premium. The bank estimates this premium to be in the range of 0.5% - 3.0%, with direct real estate investment at the lower end of the range and acquisition funds (the most common private equity strategy) at the higher end. The fund terms of these investments range from 7 to 12 years, designed for experienced, patient investors, and such long investment periods, marked by the illiquidity premium, may even be reflected in prices. "Valuations look slightly healthier than last year before a similar sharp rebound in valuations; prospects for the long term are less dragged down. Nevertheless, economic improvements are still needed to make stocks not appear overvalued." (The convergence of post-global financial crisis illiquidity premiums) Stick to established strategies, especially in times of upheaval Although enduring a setback is not a pleasant experience, it is important to remember that investing is not a boxing match, where exhaustion accumulates over time. The overwhelming news may seem unstoppable, but looking back at the bank's long-term viewpoints, these perspectives can provide a solid basis for investor action. "In the field of investments, given the slow evolution of fundamentals, and that they often tend to pull volatile prices back from extreme levels, short-term uncertainty may not necessarily long-term (uncertainty)."