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Monetary policy is the governor of the relationship between growth and inflation.

Franklin Templeton assesses the long-term correlations between 45 major asset classes using 20-year historical data, and outlines its recommended investment strategies over a 10-year horizon against the backdrop of artificial intelligence, geopolitical tensions and the accelerating climate crisis.

In Franklin Templeton’s view, high inflation represents the primary reason for rising correlations between bonds and equities. Going forward, analysts expect growth to be the key macro driver over the next decade: this means the high correlations of 2022 are less likely to persist.

However, global debt has risen to $313 trillion, which is $100 trillion more than it was a decade ago. US total public debt outstanding has almost doubled since the last time President Donald Trump was first elected in 2016. The dollar, deemed overvalued, is expected to depreciate versus most developed market currencies.

Overall, Franklin Templeton expects global equities to return 7.6% annualised over the 10-year period, with developed markets returning 7.5%. By comparison, globally developed government bonds are forecast to return 4.4% in US-dollar terms.

The term premium has oscillated over recent years, but has risen noticeably more recently, reflecting high levels of bond issuance and uncertainty around economies’ neutral rates.

Franklin Templeton argues the imposition of trade tariffs is likely to produce an inflationary impulse in the near term, but should be reversed in the medium term as demand volumes are curtailed.

The extent to which central banks are willing to halt the process of quantitative tightening and once again act as a shock-absorber to debt markets, remains to be seen.