Investors face a new reality where inflation settles closer to 3% rather than the 2% target central banks have long pursued. Swiss private bank Pictet Wealth Management suggests this change will maintain higher bond yields over the next decade, altering how markets value equities and fixed income.
Inflation’s new anchor
The bank’s latest Horizon investment outlook report projects 10-year returns across asset classes and indicates inflation will stay volatile and persistent. Kelvin Tay, chief investment officer for Asia at Pictet, described 3% as the new anchor for inflation, a level expected to sustain higher long-term bond yields. The 30-year U.S. Treasury yield recently reached 5.34%, its highest since June 2007, while the 10-year yield rose above 4.7%.
Tay highlighted 5% on the 10-year Treasury as a key marker. At that point, the equity risk premium—the additional return investors seek for holding stocks over bonds—becomes uncertain. He explained that investors begin comparing bonds and equities more closely when yields reach this level.
Pictet predicts annualized returns of 5% for U.S. government bonds over the next decade, a significant increase from the 0.9% annualized return of the past 10 years. For equities, the bank forecasts Asia ex-Japan will lead with 8.3% annualized returns, followed by Europe at 7.9%, Japan at 7.8%, and the U.S. at 6.9%.
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Three structural forces drive the term premium—the extra compensation investors require for holding long-dated debt—higher. Aging populations, resource competition, and geopolitical risk all contribute. Tay noted the U.S. labor participation rate has fallen to a 50-year low, partly due to stricter immigration policies. He mentioned the Trump administration’s decision not to renew many H-1B visas for specialized foreign workers.
Resource competition adds pressure. A shortage of dynamic random-access memory chips, essential for AI and computing, keeps prices high. Tay said new supply is not expected before 2029 or 2030. Ongoing unrest in the Middle East also maintains raised oil prices, further fueling inflation.
These factors shift the global economy from an era of abundant capital to one with greater competition for it. Over time, AI may counter some of these pressures by improving productivity and reducing inflation. Frederik Ducrozet, head of strategy and macro research at Pictet, said services—especially in the U.S. and U.K.—represent the next frontier for AI adoption. Healthcare and defense, he added, stand to gain from broader productivity improvements.
Technology’s effect on inflation remains complex. While AI could ease some cost pressures, its adoption may also increase demand for scarce resources, keeping yields above pre-pandemic levels.
Emerging markets beyond China
Emerging markets now play a central role in the AI and technology supply chain, no longer relying solely on China’s growth. These economies produce semiconductors, DRAM chips, and rare earths. South Korea, Taiwan, China, Malaysia, and Thailand dominate chip manufacturing, while Latin America and Africa control key commodities. Singapore, though not classified as an emerging market, remains critical.
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Tay explained that in the past, China’s performance dictated emerging market equities.
Singapore’s steady outlook
Pictet anticipates stable growth for Singapore, with potential gains for the Singdollar and local equities. Tay pointed to government measures supporting the stock exchange, including the Equity Market Development Programme. The Monetary Authority of Singapore has allocated S$3.95 billion to nine asset managers.
The Singdollar may strengthen due to AI-related export demand. Alison Lim, CEO of Pictet’s Singapore branch, said the firm advises globally diversified portfolios but notes rising interest in Singdollar-denominated solutions among local family offices. While Singapore dollar fixed income offers lower yields, local equities—particularly high-dividend real estate investment trusts—could benefit from this trend.
Markets must adapt to a world where higher inflation becomes the standard rather than an exception.