Era of race for resources calls for diversification and assets governments can’t print

TODAY’S increasingly fragmented world is driving a dash to secure resource sovereignty as governments prioritise energy security and access to key commodities in the event of conflicts, trade barriers and climate change.

Our latest annual Horizon report looks into this “race for resource sovereignty” and how it will drive economies, and offers return projections for more than 50 asset classes and strategic asset allocation in the coming decade.

Over the next 10 years, we expect inflation to remain volatile and sticky. In the near term, it is driven by commodities and “techflation” due to demand for the materials needed to power artificial intelligence, while secular drivers such as demographics and decarbonisation fuel inflationary pressures.

Resource sovereignty in an electric era

Energy independence and secure access to commodities have become central to economic policy in the 2020s. As the world shifts from fossil fuels to electrification, the structure of global commodity demand is undergoing a fundamental transformation, with profound implications for economic resilience, inflation and geopolitical influence.  

The scope of strategic commodities has broadened to include critical minerals, as well as agricultural commodities and industrial inputs. Countries now compete to secure mining rights, build refining capacity, and control downstream supply chains.

Export restrictions affect over half of key energy minerals. Strategic stockpiling and industrial policy are increasing globally, potentially leading to competing supply blocs, lower market efficiency and higher costs.

Over the long term, we are positive on commodity prices due to persistent and growing tensions between supply and demand, and high supply concentration.

AI’s productivity promise

AI is likely to become one of the most consequential macroeconomic forces of the coming decades. It has the potential to boost economic growth, while raising concerns about job displacement and the uneven distribution of gains among workers, firms and countries.

We expect AI to gradually lift productivity and exert disinflationary pressure – particularly in services – while raising near-term capex-driven price pressures in electricity, advanced semiconductors and construction inputs.

However, the transmission will be slow, with a five to 10-year lag after the deployment phase, reflecting implementation costs, organisational adaptation and skills acquisition.

We therefore incorporate conservative estimates in our macro forecasts. In the US, we have raised our real gross domestic product growth forecast for the next decade by 0.4 percentage points, with higher productivity growth offsetting the diminishing contribution from labour supply.

We expect a 0.5 percentage point annual productivity boost in the US over the next decade, and smaller uplifts of 0.1 to 0.3 percentage points in Europe and Japan, respectively.

Capital scarcity and structurally higher funding cost

The coming decade is likely to be characterised by forces that keep inflation and nominal growth above pre-pandemic norms. We expect central banks to remain highly active and pragmatic, while remaining responsive to inflationary pressures to preserve credibility with market participants.

The US Fed policy rate is likely to stabilise around 3.25 to 3.5 per cent, and the European Central Bank deposit rate, around 2.25 per cent.

Demand for capital is rising as governments finance infrastructure, defence, technological transformation and ageing‑related social spending, while companies enter a new capex cycle to adapt to agentic AI.

As a result, investors are likely to demand higher compensation to lend over the long term. We expect the US 10‑year Treasury yield to converge at around 4.75 per cent by the end of the next decade, the German Bund at around 3.3 per cent, and the Swiss 10‑year government bond yield at around 1.2 per cent.

Higher government and corporate bond yields could make fixed income more attractive as investors lock in higher yields. We see the highest expected returns in countries offering elevated carry, particularly the US, the UK and parts of emerging markets (EMs), where attractive nominal yields should continue drawing capital.

Over time, the combination of rising borrowing costs, ongoing portfolio diversification and the relative strength of Asian economies are likely to favour a structural appreciation of Asian currencies and countries with credible fiscal outlooks and disciplined central banks.

Impact of AI adaption on equity market profitability

Over the long run, AI adoption is likely to have a positive impact on both economic productivity and corporate margins in general. However, in the short term, we are seeing a significant divergence in profitability between sectors that are benefiting from this huge capex wave and the rest of the market.

Over the next 10 years, we model a modest decline in overall equity market profitability to reflect:

• the high starting point;
• a normalisation in some technology-sector margins once the AI capex investment wave slows; and
• the probability of higher corporate taxes and capital costs.

A new upcycle for EMs

EMs are moving back to the centre of the global investment landscape, increasingly providing what the world now needs most – the infrastructure behind AI, with a significant share of this ecosystem designed, manufactured or assembled in EMs, particularly North Asia, as well as the resources underpinning the supply and security of energy and other raw materials.

Many large EM economies now combine lower public debt levels with healthier external balances, including current-account surpluses and improving balance-of-payments dynamics.

Local currency bond markets across EMs have expanded significantly, providing a more stable source of domestic funding and reducing vulnerabilities to foreign-exchange movements.

Meanwhile, EM central banks have generally maintained relatively elevated nominal yields to preserve inflation credibility and attract capital inflows.

We expect EM sovereign bonds to deliver returns of around 6.3 per cent over the next 10 years, with even higher expected returns for EM hard currency corporate bonds, at close to 7 per cent.

As a result, segments of the EM equity and credit universe are now tied to a multi-year investment cycle driven by digital infrastructure and AI deployment, rather than short-term consumer trends.

Focus on domestic resilience

Increased government intervention in economies and markets has been slowly gathering pace since the global financial crisis. The subsequent Covid crisis prompted a dual response with aggressive monetary and fiscal policy stimulus.

The shorter-term impact tends to be positive as policymakers target higher economic growth to stabilise budget deficits, reduce inequality, improve consumer confidence and potentially help politicians get re-elected.

Policymakers are also expected to embark on additional spending to improve self-resilience in supply chains, raw materials and defence.

The increasing focus on improving both the growth and resilience of domestic economies should be particularly beneficial to tangible assets, such as commodities, infrastructure and factories, which have the added benefit of being less prone to AI disruption risk, given their physical characteristics.

Understanding the risks and opportunities in this new world order will be crucial for those managing portfolios. This more fragmented world calls for diversified portfolios with a focus on the tangible assets that underpin AI infrastructure and the electrified economies.

In a world of structurally higher inflation and government deficits, the takeaway is clear: buy assets that governments cannot print.

The writer is chief investment officer for Asia at Pictet Wealth Management