The trouble before the bubble

Both “safe” and “risky” assets have struggled during Q3 so far, as “risk-free” yields have risen. We expect the fortunes of safe assets to improve over the rest of this year, largely informed by our view that investors are underestimating how quickly and/or how far central banks will cut interest rates over the next couple of years. We anticipate that risky assets will remain under pressure this year as economic growth across developed markets (DMs) falters; but, as monetary policy eases next year and economic growth rebounds, we forecast strong returns from most risky assets over both 2024 and 2025.

In particular, we think that the returns from equities will exceed those from other asset classes over the next few years. That’s largely because we think stocks – particularly in the US and, to a lesser extent, other DMs – will benefit from growing excitement around artificial intelligence (AI). We discuss the potential economic and market implications of AI in our Spotlight series: in short, we think it is a transformative technology and, while its benefits are likely to diffuse only slowly through economies, we suspect that investors will want to crystallise them upfront. That could lead to the formation of a bubble in stock markets over the coming years.