Decade Ahead
The 5Ds and asset class expectations
The 5Ds—debt, deglobalization, demographics, decarbonization, and digitalization—will be significant forces in the decade ahead that present opportunities and risks for investors. In aggregate, we expect them to lead to higher growth and periods of higher inflation over the long term.
Debt: A growing concern
Fueled by the extraordinary fiscal stimulus following the COVID-19 pandemic, aging populations, and increased defense spending, government debt has grown considerably since the beginning of the decade.
With debt levels now much higher, governments have reduced capacity to deal with a future recession or inflationary shock. There is therefore a greater risk of swings in long-dated government bond yields on periodic fiscal sustainability concerns. Higher taxes could be one way of accounting for higher debt levels.
With a higher risk that governments lean on central banks to finance deficits, we advise boosting exposure to real assets (including equities, real estate, infrastructure, and gold) in portfolios, as they have a greater chance of matching or exceeding rates of inflation than cash or fixed income.
Deglobalization: Shifting paradigm
In recent years, the world has become less global, influenced by the pandemic, rising nationalism, geopolitical tensions, and technological changes. These factors have led countries to prioritize domestic interests, resulting in increased trade barriers and protectionist policies. The election of President Trump, with his “America First” approach, could further accelerate these changes.
Active conflicts in regions such as Eastern Europe and the Middle East add to this trend, creating instability and discouraging international collaboration. Technological advancements, while facilitating global communication, have also enabled more self-sufficient economic strategies.
Any increase in trade and capital flow restrictions could lead to higher costs for consumers and businesses, slower global growth, and increased inflation. We also expect increased spending on defense to raise levels of debt and inflation.
Despite these challenges, deglobalization offers growth opportunities in certain sectors. As countries focus on cyber and national security, investment and innovation in these areas may rise, creating new growth avenues. Companies involved in reshoring, automation, and national security could benefit from increased demand.
Demographics: Longevity in focus
Demographics are slow-moving, but we have already seen significant shifts in demographic patterns since the turn of the decade. According to the UN, the global population over 65 has grown by around 100 million in the past five years.
The combination of aging populations in the US, Europe, and North Asia with young and fast-growing populations in Africa and South Asia is likely to present both challenges and opportunities. How societies—individually and collectively—choose to manage migration will play an important role in determining the impact on economic growth and inflation.
For investors, we expect aging populations in the developed world to contribute to the growing emergence of a transformational innovation opportunity in the field of human longevity.
Decarbonization: Power and resources
Since the start of the decade, renewable energy has accounted for a greater share of the global energy mix, with fossil fuels accounting for a lesser share. Looking ahead, we anticipate that regulatory pressure to decarbonize will persist, and several factors could drive up the prices of scarce resources, including resource protectionism, environmental taxes, higher insurance costs, and restrictions on certain energy sources.
It remains uncertain whether societies are prepared to accept higher energy costs, especially if energy demand rises owing to increased use of artificial intelligence. Despite these challenges, the substantial investment needed to meet rising energy demand and sustainability goals could also stimulate economic growth.
We believe the biggest investment opportunity in the field is with power and resource innovation.
Digitalization: The AI revolution
We believe artificial intelligence could prove to be one of the most influential innovations of the century. While most market attention so far has focused on the firms enabling the technology, we ultimately expect AI to drive efficiency, innovation, and new business models across sectors, from automating routine tasks to enabling advanced data analytics.
If AI’s potential can be realized, we believe it could augur a productivity revolution, and contribute to lower prices for various goods and services and higher rates of economic growth. Historical examples can provide some context for the potential magnitude. The PC increased labor productivity by 18% from 1986 to 2000, and the internet by 20% from 2000 to present. Assuming a 15% productivity boost from AI, we estimate the value creation could amount to USD 4.4 trillion.
For investors, at a macroeconomic level, we believe the AI revolution is likely to help lower inflation, boost growth, and therefore result in higher real interest rates in the years ahead. At a company level, we see potential across the enabling, intelligence, and application layers.
While history remembers the 1920s for unprecedented prosperity, it was also a time of upheaval. From world-class tech companies to rising economic powerhouses like India and Brazil, what role do emerging markets play in this evolving story?
Since the beginning of the decade, cash returns have struggled to surpass inflation and bonds have faced headwinds from rising interest rates. In contrast, equities have thrived, and private markets and commodities have offered robust returns. Looking ahead, we expect equities and private markets to continue to offer the highest potential returns.
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Disclaimers
Disclaimers
Year Ahead 2025 – UBS House View
Chief Investment Office GWM | Investment Research
This report has been prepared by UBS AG, UBS AG London Branch, UBS Switzerland AG, UBS Financial Services Inc. (UBS FS), UBS AG Singapore Branch, UBS AG Hong Kong Branch, and UBS SuMi TRUST Wealth Management Co., Ltd.