Advances in AI, automation and robotics are transforming productivity and labor markets, offsetting aging populations but also causing job displacement. Retraining workers and monitoring productivity measures will be vital. Investors should monitor these shifts as they impact sector performance and economic growth.

Nearly 40% of jobs worldwide — and 60% in advanced economies — are now exposed to AI. For investors, this signals a major shift: AI adoption is poised to drive productivity gains and fundamentally reshape labor markets, creating both risks and opportunities across sectors.

Geopolitical tensions and protectionism are pushing countries to pursue economic self-reliance. While this may slow growth and boost inflation, local innovation and strategic alliances could enhance competitiveness. This creates both opportunities and risks for investors as nations strengthen domestic markets and supply chains.

With U.S. effective tariff rates hitting levels not seen in about 80 years, the rest of the world is seeking to reduce uncertainty from protectionist U.S. trade measures. U.S. trade measures are creating new impetus to expand and deepen regional, bilateral and multilateral agreements, while forcing countries and regions to look inward to reduce internal hurdles to trade, growth and increased competitiveness.

Rising debt and persistent government budget deficits, intensified by aging populations and higher public spending, threaten global growth. While AI may aid the U.S., some nations could struggle. High debt dampens innovation and limits policy options. Reforms, public support and strategic investments will be crucial.

Deficits across developed markets are exceeding pre-pandemic levels despite solid economic recoveries and rebounds in employment. This persistent gap underscores significant threats to sustained economic expansion.

Fixed Income: Set to Improve

Global fixed income markets are set to improve as interest rates normalize, inflation nears targets and yield curves steepen. Moderate growth and controlled risks underpin this outlook. Long-term investors can expect stable, modest returns, with our forecasts suggesting steady performance over the next decade.

Contributing factors to our forecasts:

• A steeper Treasury curve enhances roll return for investors (return when investors hold bonds to maturity), offering a modest improvement over prior year forecasts. 
• We expect U.S. high yield bonds to avoid an avalanche of defaults, assuming no recession.
• With slow but steady growth and the normalization of interest rates, we think investors in European, U.K. and Japanese bonds can expect decent income with low volatility.

Equities: U.S., Japanese and Australian Leadership

Moderate economic growth and profit margins, and varied changes in valuations across regions, back our return forecasts. The U.S., Japan and Australia are projected to lead returns. We expect lower returns from emerging markets, though they likely will continue to offer attractive dividend yields.

Contributing factors to our forecasts:

• We expect revenues of U.S. companies to increase 3.5% a year on average over the next 10 years — 2.3% less than the last decade, but still healthy growth from an absolute perspective.
• We see continued healthy dividend yields in Europe, along with some valuation expansion from relatively low levels. 
• Japan’s competitive advantages in semiconductors, robotics and automation backed by our theme of Rising Innovation, Declining Demographics likely will support profit margin expansion.
• With The Global Shift to Self-Reliance, Australia is benefitting from natural resource and mineral demand from China, India and the U.S., boosting our revenue projections.

Real Assets: AI Drives Demand

The primary real assets sectors (global natural resources, real estate and infrastructure)  can be thought of as a hybrid  between fixed income and equities, offering characteristics of both. In comparison to broader equities, real assets typically have higher current yields and greater stability of cash flows. Further, these asset classes offer elements of inflation protection and interest rate sensitivity.

Contributing factors to our forecasts:

• Natural resources: The Global Shift to Self-Reliance may stoke demand for commodities to support AI, advanced defense equipment and robotics.
• Global infrastructure: Increasing global power demand likely will drive growth, particularly for the global utility sector.
• Global real estate: Lower interest rates could stifle declines in commercial real estate deals and AI growth may boost demand for real estate to support data centers.

Private Markets: Expected Outperformance of Public Markets

Private credit may benefit from shifting rates and tech trends, supporting AI and private firms. Private equity and venture capital likely will outperform public markets, driven by innovation. Real assets in private markets are set to excel amid technological and demographic changes.

Contributing factors to our forecasts:

• Although we expect lower rates to compress yields to some extent, we believe private credit deployment will increase in conjunction with the expected pickup in M&A activity.
• We forecast a 10.2% annualized return for private equity and venture capital combined, which includes a 10.5% expected return for venture capital and 10.2% return for both buyout and growth equity sectors.
• Private infrastructure’s exposure to high growth areas, such as digital infrastructure, supports our forecasted premium over public markets.

The next decade will present both significant challenges and compelling opportunities for investors willing to adapt and think strategically. Persistent inflation, uneven growth and fiscal constraints are reshaping the global economy, emphasizing a focus on the themes around innovation, domestic self-reliance and navigating the risks of growing government deficits.

Global investment grade bonds – Bloomberg Global Aggregate Index: The index is a flagship measure of global investment grade debt from 28 local currency markets. This multi-currency benchmark includes treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging markets issuers.

U.S. investment grade bonds - Bloomberg U.S. Aggregate Index: The index measures the performance of investment-grade, U.S. dollar-denominated, fixed-rate taxable bond market. The index includes Treasurys, government-related and corporate securities, fixed-rate agency mortgage securities, asset-backed securities and commercial mortgage-backed securities (agency and non-agency).

Europe investment grade bonds – Bloomberg Euro Aggregate Index: The index measures the performance of the investment-grade, euro-denominated, fixed-rate bond market, including treasuries, government-related, corporate and securitized issues.

U.S. high yield bonds - Bloomberg U.S. High Yield Index: The index measures the U.S. dollar-denominated high-yield fixed-rate corporate bond market.

Global equities – MSCI AC World Index: The index is a global equity index that includes large- and mid-cap companies from developed markets and emerging markets.

U.S. equities – MSCI USA Index: The index is designed to measure the performance of the large- and mid-cap companies in the U.S.

Europe equities – MSCI Europe ex U.K. Index: The index is designed to measure the performance of large- and mid-cap companies across countries in Europe excluding the U.K.

Emerging market equities - MSCI Emerging Markets Index: The index measures the performance of large- and mid- cap companies in 24 emerging-market countries.

Canada equities - MSCI Canada Index: The index measure the performance of the large- and mid-cap segments of the Canadian equity market.

Japan equities - MSCI Japan Index: The index measures the performance of the large- and mid-cap segments of the Japanese equity market.

U.K. equities – MSCI U.K. Index: The index measures the performance of the large- and mid-cap segments of the U.K. equity market.

Australia equities – MSCI Australia Index: The index measures the performance of the large- and mid-cap segments of the Australian equity market.

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