The War in Iran and the El Niño Phenomenon Transform the Agricultural Commodities Market

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The Center for Climate Prediction of the National Oceanic and Atmospheric Administration (NOAA) maintained an advisory on the El Niño phenomenon and stated that it is intensifying, with a probability exceeding 90% that a very intense episode will occur during the autumn and winter of the Northern Hemisphere in 2026-27. The starting point for any outlook on the agricultural market facing 2027 is that meteorological agencies have reached a consensus, and have done so with unusual certainty.

The World Meteorological Organization reached the same conclusion on September 3, indicating a probability close to 100% that El Niño will persist during the periods from September to November 2026 and from December to February 2027, with the forecast that the phenomenon will reach a very strong intensity before reaching its peak toward the end of the year. Monitoring data from the Australian Bureau of Meteorology agree: the so-called relative El Niño 3.4 index reached +2.51 °C in the week ending September 13, compared to an El Niño threshold of +0.80 °C, while most models indicate that a maximum exceeding +3.0 °C will be reached and it is forecast that the phenomenon will persist until the autumn of 2027.

Oceanic Niño Index (ONI), from 2000 to Present. Source: National Oceanic and Atmospheric Administration (NOAA), Bloomberg Finance L.P. and WisdomTree, as of July 31, 2026.

The effects of El Niño on agriculture occur with a delay of between six and twelve months relative to the peak, due to the time it takes for atmospheric changes to modify local climate, affect crop cycles and impact global supply chains. Therefore, an event that reaches its peak at the end of the year impacts more directly the 2026/27 crops that are currently being sown or prepared: the Southern Hemisphere summer harvest, India’s Rabi season, West Africa’s main harvest, and Southeast Asia’s oil palm and robusta coffee cycles. The price impacts of what is happening in the Pacific will be felt mainly starting in 2027.

The Gulf Conflict Has Shifted from Focusing on Energy to Being a Matter of Inputs

The Gulf conflict has lasted seven months now and, instead of stabilizing, it has escalated. The ceasefire agreed upon in April and the memorandum of understanding signed in June were rendered ineffective when hostilities resumed in July. The recent event with the greatest impact took place on September 11, when Saudi Arabia closed its 1,200-kilometer east-west pipeline following a drone attack, which meant the closure of the main route by which Gulf crude bypasses the Strait of Hormuz.

In the agricultural sector, main exposure derives from the trade of fertilizers and raw materials transiting through the same waterway, and it is precisely the difference compared to 2022 that makes it lasting. The war between Russia and Ukraine in 2022 diverted trade flows, whereas this one has diminished productive capacity. It is estimated that 31 ammonia plants across the Middle East have been directly affected or closed down completely; another 49 in South Asia have reduced production or are halted due to raw material shortages; and at least 20 Russian plants have suffered damage due to drone attacks.

Their reactivation will require time and capital far beyond the end of hostilities. Persian Gulf countries account for approximately 43% of seaborne urea exports and 44% of seaborne sulfur trade. Even in the United States, which obtains two-thirds of both its urea and phosphate from the domestic market, 12% of the urea supply and 17% of DAP/MAP (diammonium phosphate/monoammonium phosphate) comes from beyond the Strait. This points to a capacity constraint extending across several seasons, rather than a freight transport issue.

Grains: A Group of Annual Crops That Already Carries a Risk Premium

The energy sector has recorded the largest individual variations of the year 2026, and refined products and crude oil occupy four of the top five spots. However, what is most revealing about the year-to-date performance table is the breadth, rather than the magnitude. Agriculture occupies virtually the entire space of the ranking between rice and sugar.

Cumulative Performance Year-to-Date Across Commodity Groups. Source: Bloomberg Finance L.P. and WisdomTree, as of September 21, 2026.

What has driven crops throughout the year has been almost exclusively geopolitical and input factors, rather than weather factors. Wheat is the clearest example: the World Agricultural Supply and Demand Estimates (WASDE) report for September was clearly bearish, as world production for the 2026/27 campaign was revised upward by 3.1 million tons to 822.4 million due to increased harvests in Australia and Canada, and ending stocks were increased by 3 million tons to 276.3 million. However, wheat prices have risen 42% year-to-date, as continued Russian and Ukrainian attacks against Black Sea port infrastructure have disrupted the physical route for nearly a quarter of world wheat exports. Net speculative positioning in wheat increased 130% last month, reflecting an improvement in confidence regarding this grain. For this commodity, the structural outlook could depend on whether the current risk premium proves persistent, rather than sporadic. Black Sea infrastructure has now become a recurrent target, rather than representing a one-off disruption, and Australian wheat is in the highest exposure band to El Niño for the 2026/27 harvest.

On the other hand, corn markets are highlighting a genuine supply contraction. U.S. production for 2026/27 was cut by 5.4 million tons to 401.3 million due to hot conditions and uneven rainfall. Global production was reduced by 7.9 million tons to 1,291 million, and global ending stocks fell by 2.6 million tons to 272.1 million. Net positioning increased 92%. In the case of corn, the argument that has been made for years is the constraint in inputs. Corn is the most nitrogen-intensive crop, and fertilizer prices are projected to remain above pre-conflict levels until 2028. Where prolonged under-application of phosphate and potassium is already observed, doses have decreased between 10% and 15% in recent years. Consequences on yield manifest with a three-year lag. This is a slow, cumulative drag that affects the yield trend, rather than a one-off single-season disruption, and is the mechanism by which this conflict extends beyond itself.

Meanwhile, the soybean sector has been driven more by demand than supply. The United States Department of Agriculture (USDA) has raised U.S. production to 123.4 million tons, but China has already purchased nearly 13 million tons this season, representing more than half of its annual commitment of 25 million tons, valid until the year 2028, in addition to a broader commitment to purchase $17 billion worth of agricultural products. China’s purchase commitment extends until 2028 and could provide some demand support that depends less directly on weather conditions. The reason for short-term caution is stocks: soybean and soybean oil reserves stand 7.9% and 8.5% above their five-year seasonal averages. Soybean oil features an additional and underappreciated support factor in the energy context: with crude oil above $100, biofuel demand could strengthen the vegetable oil sector independently of oil production.

Soft Commodities: The Sector Where the Meteorological Signal Is Least Reflected in Prices

The cumulative year-to-date performance table makes it clear. Sugar is up 20%, cotton up 25%, but cocoa is down 9%, coffee down 22%, and orange juice down 28%. The soft agricultural products sector, which historically has shown the greatest sensitivity to El Niño, has been the weakest link in the agricultural sector this year.

The exception is sugar and the clearest expression of the double impact. In early September, raw sugar was trading at 18.44 cents per pound, near the 16-month high located at 18.77 cents, as supply reduction reinforced expectations of a deficit in the 2026/27 campaign. Production in center-south Brazil fell 7.9% during the first half of August, and high energy prices continue to encourage mills to prioritize ethanol over sugar. India has authorized the duty-free import of one million tons of raw material, while drastically reducing ethanol diversion, a combination of measures suggesting domestic stocks are tighter than official figures indicate. Monsoon rainfall has been significantly below normal in Maharashtra, Karnataka, and Marathwada, regions representing close to one-third of Indian production. Sugar is affected by both meteorological conditions and energy price pass-through, and holds the thinnest inventory cushion among major soft agricultural products.

Cocoa is the crop generating the most controversy. Prices have recovered strongly since the low recorded in the second quarter, with New York futures standing around $6,250 per ton, and rainfall in West Africa during the August mini-drought was well below normal levels for this time of year, representing a real risk to pod survival and main crop development if rain does not fall. In contrast, the stock situation is fundamentally different from that of 2023/24. ICE-certified stocks have recovered to near their two-year high, while European cocoa grindings in the first quarter fell 4.6% year-on-year to reach their lowest level in 17 years. The cocoa sector faces this El Niño episode with reserves it lacked two years ago, and with demand clearly damped by the previous price crisis. The bullish thesis is based on weather conditions overcoming those reserves; it is not the same strategy as in 2023.

Regarding Arabica coffee, it faces improving supply: the Brazilian harvest is well advanced and revised export registry data indicate significantly higher flows than previously reported. Certified stocks remain near multi-year lows and physical availability is tight, but the supply trend is positive. The Robusta variety is the most interesting investment. It has been trading near multi-month lows, around $3,296 per ton, precisely as drought spreads across Indonesia and Vietnam during a critical flowering period. Since coffee is a perennial plant, damage suffered during flowering affects the 2027/28 crop, not the current one. Robusta coffee prices stand near their recent lows, even though major producing regions lie in the highest exposure band to the El Niño phenomenon. This creates a divergence between current prices and potential meteorological risks threatening supply.

For its part, cotton is up 25% year-to-date and is the commodity most dependent on demand. Recent price evolution has been downward due to improving U.S. crop conditions, declining export sales, and a strengthening dollar. The curve is in contango, somewhat steepened compared to wheat or corn, which contrasts with cotton stocks being the tightest of the group seasonally. That divergence highlights that the market is placing more weight on current crop conditions than on previous harvest scarcity, and that should a weather disruption occur in 2027, there would be very little margin for error. However, the long-term evolution of cotton is more closely tied to global textile demand and the dollar than to the Pacific region.

Conclusion

Two disruptions impact the same production window from different directions. The Gulf conflict increases cost and limits availability of inputs used prior to the 2026/27 campaign, doing so over a multi-year horizon, as damage affects production capacity rather than trade routes. El Niño increases the likelihood that the yields those inputs aim to protect fall below trend, with a lag in market transmission between six and twelve months relative to the oceanic peak, meaning its effects will be felt mainly in 2027.

The intensity of El Niño and its regional meteorological effects could differ from current forecasts, while an easing of geopolitical tensions could reduce pressure on energy and fertilizer markets. Better-than-expected harvests, inventory replenishment, lower demand, or changes in government policy could also offset pressures arising from meteorological conditions and input costs, resulting in commodity price performance different from that analyzed above.

José Corena (MFS): “A Machine Cannot Understand a Relationship Between An Advisor And A Client That May Have Developed Over 30 years”

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Macro and geopolitical uncertainty, interest rates that have stayed higher for longer and high index concentration are testing investors and their advisors alike. Now artificial intelligence is adding a new source of noise to the advisory relationship – “and clients are really listening to AI”, warns José Corena, Managing Director of the Americas at MFS Investment Management. In an exclusive interview with Funds Society, Corena explains why Latin American investors are unlikely to fall out of love with fixed income, and why liquidity concerns suggest private markets may already have peaked: “We have probably already seen a peak in private credit and private equity.”

Corena also makes the case for active management, highlighting MFS Meridian Funds – Contrarian Capital Fund and the firm’s Blended Research range, which combines fundamental and quantitative research. He also discusses the expansion of MFS’ active ETF line-up and what it takes to get new products onto distribution platforms.

Finally, he reflects on a year of change in MFS’ regional team, which spans Chile, Uruguay, Brazil, Colombia, Miami, New York, Texas and the U.S. West Coast, and explains why having people on the ground remains central to its strategy.

With markets this complex, what are clients really asking for?

Simple: they don’t want to lose money. That sounds straightforward, but markets have become far more complex. Geopolitical fragmentation is reshaping trade and investment decisions, interest rates have stayed higher for longer than expected, and a handful of stocks now dominate the major indices. When so much of the market rests on so few names, owning the index is not quite the safe harbour it seems – and research, selectivity and genuine diversification start to matter a great deal more.

On top of that, AI is adding another layer of noise between advisors, their teams and their clients – and clients are really listening to it.

Latin American investors have long had a love affair with fixed income. Is it still justified?

Very much so. Latin American investors will always have a soft spot for fixed income, and today the asset class is giving them good reason. After years of near-zero rates, bonds are once again offering something investors had almost forgotten about: meaningful income. For clients, that combination of income, diversification and liquidity is hard to ignore.

Some investors have been looking for that income in private credit. But I think we have probably already seen a peak in private credit and private equity. Clients are increasingly asking what they are really being paid to lock up capital for seven or ten years, and in our view the reward for illiquidity has been shrinking. Public credit, by contrast, offers attractive yields and solid fundamentals – and you can get your money back when you need it.

That doesn’t mean fixed income is a market to own blindly. Not every borrower is equally well placed, so research and careful credit selection make a real difference. Each country also has its own dynamics. In Mexico, institutional investors have plenty of local fixed income opportunities, while Chile‘s pension reform could bring greater flexibility in asset allocation. But the common thread across the region is the search for reliable income without giving up liquidity.

MFS is a committed active manager. How are you responding to the shift towards passive?

We are a global active manager with more than 100 years of history, and we are fully committed to public markets. We don’t do alternatives, private credit or private equity. Instead, we focus on what we do best: active management across public equity and fixed income, allocating capital responsibly and always with a long-term lens.

That said, we recognise that investors have choices – between active and passive, and between vehicles, from traditional mutual funds to the growing area of active ETFs. We launched our first active ETFs in the U.S. in December 2024 and now have 13, covering U.S. and international equities as well as fixed income. They have been very well received, with assets of more than $3 billion, and tax-loss harvesting has been an important driver of demand.

Active management is here to stay, even if it increasingly sits alongside low-tracking-error strategies, active ETFs and passive products. The Magnificent Seven have done extraordinarily well, but that doesn’t mean the other 493 companies in the S&P 500 lack potential. Concentration doesn’t last forever. New competitors emerge, and AI is lowering the barriers to entry, which could accelerate that process. As market leadership broadens, active managers are well placed to find the next generation of leading companies.

Which strategies are standing out this year?

Two in particular – and on the surface they couldn’t be more different, which is exactly the point. One goes where other investors fear to tread; the other makes sure we don’t miss what the market has overlooked.

MFS Meridian Funds – Contrarian Capital Fund is built on a simple truth: markets change, but human nature doesn’t. When a company hits trouble – a management misstep, a supply-chain snag, a cyclical slump mistaken for structural decline – fear takes over and investors sell first and ask questions later. That is when perfectly sound businesses end up trading well below what they are worth. Our portfolio managers, Anne-Christine Farstad and Zahid Kassam, lean into that discomfort rather than run from it. As they like to put it, you buy where it hurts.

Buying cheap shares is the easy part; the real skill is telling a temporary setback from a permanent one. We don’t invest in certainty – we invest in probabilities. The lower the price we pay, the less needs to go right, so a margin of safety is non-negotiable. So is a strong balance sheet, which buys a company time to fix what went wrong. When the dust settles and the fundamentals shine through again, that is when we believe the share price can bounce back. The result is a concentrated portfolio, built stock by stock with no regard for benchmark weights. Notably, it has no technology exposure today – and that is no accident. Tech is the market’s favourite trade, and the valuations show it; there is nothing contrarian about paying top prices for what everyone already owns. Even so, since its launch in November 2024, the fund has outperformed its benchmark, the MSCI World Value Index, and passed US$1 billion in assets in less than two years.

Blended Research takes a very different route to the same destination – generating alpha for clients. Every stock gets two independent opinions – one from our fundamental analysts, one from our quantitative models – and we focus on the “intersection” stocks that both rate positively. Quantitative models tend to shine when markets are driven by momentum; fundamental research comes into its own when momentum fades. Together, they give us human judgement and machine discipline across a far broader universe of securities. Long before AI became the talk of every boardroom, we were putting people and models to work side by side: we launched our first Blended Research strategy in 2001, so this is a capability with a 25-year history. Different routes, same conviction – in today’s concentrated markets, the best opportunities are often where the crowd isn’t looking.

Fee-based advisory is growing in U.S. wealth management. Is Latin America following?

In the U.S. offshore business serving non-U.S. clients, advisors increasingly see the benefits of the advisory model. Larger teams are forming because they are building businesses around longevity and generational planning, not individual transactions.

Generational and technological change mean advisors need time to build relationships with clients and their wider families. But transactional business won’t disappear. I expect the two models to coexist – some clients will want an advisory relationship, others won’t – and we can serve both.

The Southern Cone faces a particularly tough transition from brokerage to advisory, and reaching U.S. levels of advisory penetration would be hard given how the independent ecosystem works. Independent brokers rely on trailers, or retrocessions, as their advisory fee, and they don’t have the scale or time to work with 15, 20 or 25 fund houses, so they focus on five or ten. There are advisory elements in their model, but it is not true advisory.

How do you get new products onto those platforms?

We have a dedicated team of relationship managers working across our U.S. domestic, international and global platforms. Platforms have become more selective. Many products were approved 20 or 25 years ago, so firms already have a large line-up to review. The question now is simple: what makes a new product distinctive enough to justify adding it?

On the independent side, platforms such as Insigneo – one of our largest clients in Latin America – matter a great deal, and Insigneo has been relatively open to new products. Launching in the Southern Cone can also help us build scale, which in turn strengthens the case for those products with U.S.-based clients. We have some distinctive strategies coming to market, and we hope they will reach the critical mass needed for approval.

It has been a year of change for your regional team. What does that mean for the clients and advisors you work with?

It has probably been the year of most change for our team, and most of the moves were personal decisions. We are known for our low turnover as a firm, in both the investment department and even in distribution. Sometimes when long-tenured colleagues leave, it is a good reminder that change is constant.

What does not change is the continuity and the priority of having people on the ground. Advisors want a partner who understands their market, picks up the phone when markets get difficult and brings our global research to their clients’ portfolios. We want to be the people advisors call before they talk to their clients, not after.

Finally, what role will AI play in the future of investment and advice?

AI is here to stay. I tell my team that AI will not replace us, because nothing can replicate face-to-face interaction – understanding the person and the relationship.

But if you are not using AI, you will be replaced. Used well, it can make us far more efficient.

The problem is that it adds to the enormous amount of noise we already get every day from social and mainstream media – and different platforms can give different answers. For example, we have seen advisors prepare detailed proposals, only for clients to upload them into an AI tool and ask whether they make sense. The answer can point to a passive solution, even when the whole conversation was about meeting an actively managed investment need.

That doesn’t make those recommendations right or wrong. But a machine cannot understand a relationship between an advisor and a client or family that may have been built over 20, 30 or 40 years. AI can read the document; it cannot understand the context behind the relationship.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Is There Still Room for Alpha in North American Private Equity?

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North American Private Equity Panel at the Picton Latam Summit 2026

In a context in which private equity has failed to reach the performance of public equities, returning below the S&P 500 and the MSCI ACWI over one, three, and five years, the question regarding the value of the illiquidity premium is once again on the table. The fact is there is a question hanging in the air: Is there still room to generate alpha in the asset class? Especially in North America, where the United States remains the largest and deepest market for private capital.

This is the question that brought together a panel of specialists from major specialized asset managers, convened by the Latin American distribution firm Picton, at the latest edition of its Latam Summit. Before an audience of GPs and LPs from various corners of the region, investment professionals outlined a landscape in which everyone is competing for the most attractive assets and dispersion is forcing investors to be more selective.

“There is performance, but you have to look at where to be,” said Nigel Beslee, Managing Director at Goldman Sachs. There is a major positioning challenge for investors, with the task of allocating conscientiously across different asset classes, against a backdrop of high uncertainty, significant market movements, and a technology narrative that is dictating the pace of trading desks globally.

“Nobody is aiming for median returns in PE,” the executive emphasized, as everyone is hunting for the highest returns.

“Rather than themes like sector or strategy, it is company-specific factors that drive alpha,” recalled Luca Salvato, Partner at Ares. In addition, there is the factor of certain “existential risks,” such as the AI revolution, which are difficult to quantify in a historical context given their nature as an unprecedented technology.

Against this backdrop, the professional emphasized market timing. “The timing in which a manager decides to sell the asset can generate a lot of alpha,” he assured.

The Technological Revolution

While private capital and public equity have different dynamics and characteristics, the professionals on the panel warned that private equity faces the challenge of beating a public equity market that has periodically been reaching new highs in recent years. This is mainly thanks to the effect of the stocks known as the Magnificent Seven—Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla—which group together the firms considered captains of the AI boom.

Between that and an ecosystem where investment cycles are increasingly longer, investors must find ways to access growth vectors at reasonable prices. “There is a massive trend of private for longer, especially in high-growth tech companies,” said Michael Zappert, Partner at TPG, so LPs must carefully evaluate how to access this category.

In that regard, those in the PE industry see an interesting source in the application of this technology within their portfolio companies. This, Zappert noted, can generate significant value, as “AI is going to change every aspect of work.”

Since it is currently difficult to access the major tech firms leading on this front, the professional does see more opportunities in this wave of application.

Beslee agreed with the reading, highlighting that it is “difficult” not to see AI as one of the largest market factors; while Salvato added that, although this technology will not necessarily be a major generator of alpha in the asset class, it will undoubtedly boost the companies they invest in.

Increasing Diversity of Structures

In addition to creativity in capturing AI tailwinds, the current context forces GPs to be more creative with the structuring of investment vehicles as well. “It’s about being thoughtful about the spaces where you can do something different,” in the words of Zappert; while Salvato emphasized that one cannot deny the importance of managers in asset management, given the increased sophistication of the environment in North America.

All panelists commented on their experiences applying this greater flexibility, as is the case with Leonard Green. David Kass, Partner at the firm, recounted that at the company they have had to remain flexible with the structuring of vehicles when the assets are good and fit with the firm’s investment philosophy.

Different avenues can even be pursued to invest in a diversified manner within the asset class. In the case of Goldman Sachs, they highlighted the GP Stakes strategy, which invests in stakes of specialized asset managers.

The Importance of Liquidity

In any case, professionals agree that liquidity will continue to be one of the key variables going forward in the world of private capital. “There is massive pressure for liquidity,” said Zappert, especially with the strong influx of capital that the asset class recorded in 2021. The prevailing trend in portfolios, he stressed, is toward having a higher level of liquidity, not less.

For that reason, a space that has opened up strongly is that of secondary funds and continuation vehicles, which have created new liquidity spaces for PE managers. The industry is focusing on DPI (Distributed to Paid-In Capital, the ratio of distributions to invested capital), commented Kass, so distributions generate their own pressure on portfolio management. “At some point, you have to generate liquidity,” he said.

Looking ahead, Salvato added, continuation vehicles “are here to stay” and “are becoming an important part of the ecosystem.” However, he warned, this space also features a high level of dispersion in results.

Latam Financial Services Appoints Martín Herbon as Managing Partner

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Photo courtesyMartín Herbon, Managing Partner at Latam Financial Services

After nearly three years on the Latin American distribution team at M&G Investments, veteran executive Martín Herbon is setting off in a new direction. The executive was recruited by Latam Financial Services, a firm that distributes the UK asset manager’s vehicles—among others—in the region.

The company informed Funds Society of the addition, highlighting that Herbon is “one of the top mutual fund distribution executives” in Latin America. His hiring, they explain, comes as the distribution firm expands its business in the region.

Herbon has more than 20 years of experience in the investment industry. He currently serves as Head of Global Financial Institutions at M&G Investments in London, forming part of the senior leadership team for the distribution business across Latin America, EMEA, and Asia-Pacific.

Previously, he held the same role at Natixis Investment Managers, a firm where between 2014 and 2021 he was Country Head for the Southern Cone, building an extensive network of relationships with private banks, family offices, independent advisors, pension funds, and sovereign institutions in the region.

Prior to that, he held leadership positions in portfolio management, investment strategy, and high-net-worth client advisory at RBC Wealth Management, Merrill Lynch, and Union Capital Group.

Latam Financial Services represents the asset managers M&G Investments, Nuveen, and Virtus Investment Partners, with a focus on the US Offshore and Latin American markets. Its strategy is developed from two hubs: its Miami office and its Montevideo office.

What Are Semi-Liquid Funds?

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Pixabay CC0 Public Domain

For years, investing in private markets implied accepting a demanding commitment: locking up capital for eight, ten, or more years, with no real possibility of early exit. Semi-liquid funds emerged to soften that restriction and bring these asset classes closer to a broader investor audience.

It is a middle ground between two worlds. A semi-liquid fund is a vehicle that invests in non-publicly traded assets, such as unlisted companies, private loans, infrastructure, or real estate, but offers the investor a certain capacity to enter and exit on a periodic basis. It is thus situated between traditional funds with daily liquidity and classic closed-end private equity funds.

The key difference lies in frequency. While a conventional equity fund allows participations to be redeemed on any business day, a semi-liquid fund typically opens liquidity windows on a monthly, quarterly, or even semi-annual basis.

How Liquidity Is Managed

The underlying assets cannot be sold overnight without sacrificing value. For this reason, these funds incorporate protection mechanisms for the benefit of all unitholders. The most common are:

  • Advance notice: Investors must communicate their intention to exit weeks or months in advance.
  • Redemption caps: Many funds set a limit per period, for example, a percentage of total assets. If requests exceed this limit, they are met on a proportional basis.
  • Initial lock-up periods: A minimum holding period is common before requesting an exit.
  • Liquidity reserves: Part of the portfolio is kept in more liquid assets to meet ordinary redemptions.

These mechanisms are not a flaw, but part of the design. They acknowledge that the illiquidity of the asset is inherent to the strategy.

What the Investor Looks For

The main appeal is the illiquidity premium: the additional return that, in theory, is obtained by holding assets that cannot be sold quickly. Added to this are diversification—since private markets have dynamics different from public ones—and access to opportunities not available on the stock exchange.

Furthermore, the format lowers barriers. Many semi-liquid vehicles allow lower minimum investments than traditional closed-end funds and avoid staggered capital calls, where investors must contribute funds as the manager requests them.

Risks and Points of Attention

Liquidity is “semi,” not total. In stress scenarios, when many unitholders want to exit at the same time, limits can be activated and delay payment. It is crucial, therefore, not to consider these investments as capital for immediate use.

Attention should also be paid to valuation. As these are unlisted assets, their price is calculated through models and periodic appraisals, rather than daily market quotes, which can artificially smooth apparent volatility. And, as with any alternative strategy, fees tend to be higher than in traditional management.

A Tool, Not a Universal Solution

Semi-liquid funds expand options for those seeking to diversify beyond equities and fixed income. Their usefulness depends on the investor’s time horizon, liquidity needs, and understanding of the exit terms. Reading the prospectus in detail, understanding the redemption rules, and allocating only a prudent portion of the portfolio are basic practices before investing.

International Firms See Room for Further Rallies in Brazilian Equities Following First Round

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Wikimedia CommonsPresidential Candidates of Brazil: Flávio Bolsonaro (left) and Luiz Inácio "Lula" Da Silva (right)

The strong rally in Brazilian equities following the first round of the presidential election reinforced international firms’ positive view on the country’s stocks. In analyses distributed after the vote, a range of international investment houses point to fundamentals supporting a continuation of the movement, backed by expectations of greater fiscal discipline, lower interest rates, and a resurgence of investor interest in companies linked to the domestic economy. The realization of this scenario, however, will depend on the next government’s proposals and its ability to execute them.

The Ibovespa advanced 7.70% on Monday, October 5, closing the first post-election session at 206,911.89 points. The reaction occurred after Flávio Bolsonaro finished the first round ahead of Luiz Inácio “Lula” da Silva, contradicting the president’s lead shown in some polls. The movement was accompanied by a drop in future interest rates and an appreciation of the real.

Foreign flows also gathered strength: international investors made net contributions of 10.06 billion reais into Brazilian equities during that session, the largest daily balance in the series tracked by Bloomberg since 2008.

UBS Sees Upside Potential Exceeding 30%

In the report published prior to the market open on Monday, UBS moved to adopt a “deeper and more lasting” fiscal adjustment as its base-case scenario. For the team, the higher probability of a change in government, combined with the composition of the new Congress, increases the chances of a credible fiscal anchor featuring spending control, a revision of indexation mechanisms, and a reliable trajectory of primary surpluses.

“We believe that domestic-linked equities, local interest rates, and the Brazilian real—in that order—should benefit substantially from a higher probability of this fiscal scenario,” states the report, signed by Alejo Czerwonko, Luciano Telo, Solange Srour, Ronaldo Patah, and Debora Nogueira.

According to UBS’s evaluation, the Brazilian market was trading at 8.7 times forward earnings, below its ten-year historical average of 9.7 times. If the fiscal scenario is confirmed, this multiple could approach 11.8 times.

“Combined with lower real interest rates influencing earnings expectations, this could translate into an upside potential exceeding 30% for the index over the coming months,” the team writes.

The estimate was formulated prior to the post-election session jump and therefore does not represent a projection of an additional 30% gain on top of post-rally prices.

Banks, retail, real estate developers, utilities, education, healthcare, and small caps are among the segments most sensitive to this shift. UBS also identifies room for a rotation out of oil stocks and into companies tied to domestic activity.

“If past election cycles serve as a benchmark, equity re-ratings would likely extend throughout the entire first year of the new administration, far beyond the initial post-election rally, as reform proposals advance through Congress and markets gain confidence in policy execution,” the report states.

Julius Baer Maintains Overweight Position

Julius Baer maintained its overweight recommendation on Brazilian equities. According to Nenad Dinic from the equity strategy area, the election outcome began resolving the risk-reward asymmetry identified prior to the vote in favor of the bullish thesis.

“We maintain our overweight position. The asymmetric risk-reward profile we identified before the first round is beginning to resolve in favor of our bullish thesis, with a Bolsonaro victory likely favoring faster fiscal consolidation, lower long-term interest rates, and an accelerated monetary easing cycle,” he states.

The combination of high real interest rates and low multiples offers, according to the firm, significant room for an equity re-rating.

“With real interest rates currently around 10% and local equities trading at 8.7 times forward earnings, the re-rating potential is substantial,” Dinic writes.

The strategist emphasizes, however, that electoral uncertainty should persist until the second round on October 25. Debates and initial details on fiscal proposals will remain at the center of investor attention.

Franklin Templeton Reaffirms Positive Outlook

Franklin Templeton also reaffirmed its favorable view on Brazilian equities. Larry Hatheway, Head of Research at the Franklin Templeton Institute, links this perspective to attractive valuations, earnings growth, and the possibility of falling inflation and bond yields.

“Attractive valuations for Brazilian equities and earnings growth, together with a backdrop of likely declines in inflation and bond yields, reaffirm our positive outlook on Brazilian equities,” he states.

This reading forms part of a broader conviction within the institution that investors should diversify their equity holdings beyond the United States, including emerging markets.

In local-currency Brazilian debt, Hatheway maintains a favorable assessment but adopts greater caution following asset appreciation.

“Most of the returns we anticipated between now and year-end have already materialized. Therefore, while we remain positive, we are now slightly more cautious regarding future returns,” he explains.

Aubrey Highlights Domestic Investor Capital

For Rob Brewis, Director and Manager at Aubrey Capital Management, the composition of Congress will be important for enabling deeper fiscal reforms.

“A deeper fiscal reform would need its support, and we would expect the Senate taking office next year to be more open to it than the current one,” he states.

Beyond foreign flows, Brewis highlights a potential domestic driver for the stock market. With high real interest rates, local investors had little incentive to shift resources from fixed income into equities. A shift in this landscape could expand demand for the asset class.

“The story for Brazilian equities is domestic. Local savers hold most of their money in fixed-income securities, and with real interest rates so elevated, there has been little reason to change,” he says.

“The test is knowing whether there will be fiscal discipline. If there is, and interest rates come down, we believe even a modest migration out of fixed income could, over time, represent a significant boost for equities,” he adds.

Vontobel Sees Revaluation Beyond the Stock Market

Thierry Larose, Portfolio Manager and Analyst at Vontobel, identifies a relief movement reaching across different markets. In comments sent following the initial reaction to the results, he highlighted the real’s appreciation of over 4% against the dollar, a drop of more than 100 basis points in DI futures yields compared to Friday’s close, and a tightening of credit spreads between 20 and 25 basis points.

“Investor confidence is boosted by expectations that the new government will quickly present a strong economic team, ambitious fiscal adjustment targets, and a constitutional amendment proposal shortly after the election,” he states.

The assessment continues Vontobel’s pre-election reading, which had already identified a favorable risk-reward ratio in fixed-rate government bonds.

“In our assessment, yields could compress considerably more under a Bolsonaro victory scenario than they might rise under a Lula re-election. In our view, this creates a very attractive asymmetric risk-return profile,” the firm noted.

Janus Henderson: The Market Will Demand Execution

Despite the favorable reaction, Janus Henderson emphasizes that the election results must still translate into concrete economic measures.

Thomas Haugaard, Portfolio Manager on the hard-currency emerging market debt team, considers that the first round increased the likelihood of a more market-friendly orientation. However, detailed fiscal proposals remain limited.

“Neither campaign has yet provided sufficient clarity regarding the pace, composition, or policy implementation of the adjustment,” he states.

For Haugaard, fiscal credibility remains the primary medium-term variable. A disciplined program could reduce the sovereign risk premium, improve debt dynamics, and encourage capital inflows.

“The market will ultimately demand policy execution, not merely campaign signals,” he underscores.

Aberdeen Demands Credible Proposals

Viktor Szabó, Investment Director of Fixed Income at Aberdeen Investments, also places the fiscal issue at the core of the analysis. While he considers that the new congressional composition could facilitate coalition building under an eventual Bolsonaro presidency, he emphasizes that the contest remains open.

“For markets, however, the central question remains Brazil’s fiscal outlook—its long-standing Achilles’ heel,” he states.

“Bolsonaro now needs to demonstrate that market expectations regarding stronger primary balances and fiscal reform are backed by credible proposals, rather than campaign rhetoric,” he adds.

In Szabó’s assessment, commitments made during the second-round campaign will carry more weight for markets than initial political momentum.

“The promises and commitments both candidates make over the next three weeks will matter more than the political momentum dominating the headlines,” he states.

Ebury Warns About the Duration of the “Honeymoon”

In the currency market, Diego Barnuevo, Senior Market Analyst at Ebury, sees room for a positive reaction from Brazilian assets driven by expectations of fiscal consolidation.

“The first-round surprise should initially translate into a positive reaction for Brazilian assets, including the real, supported by expectations of a more aggressive fiscal consolidation and a more sustainable growth model under an eventual Bolsonaro presidency,” he states.

The fintech considers, however, that the burden of mandatory spending limits the ability to execute significant expenditure cuts. If Bolsonaro wins, investor focus should shift toward government composition and the fulfillment of fiscal commitments.

“Fiscal announcements have so far been notably vague. Any disappointment on this front could quickly shorten the real’s honeymoon period,” Barnuevo warns.

Among international firms, expectations of fiscal adjustment and lower interest rates underpin the favorable outlook for Brazilian assets. The continuation of this movement will depend, however, on translating electoral expectations into an economic agenda capable of securing political support and producing results.

U.S. Inflation in September and Implications for the Fed

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Inflation concerns continue to be the heaviest factor explaining short-term equity movements. The consensus among economists anticipated a strong U.S. inflation reading for September, which ultimately surprised on the downside: headline CPI reached +0.6%, in line with the year-over-year rate moving from 3.4% to 3.7%, while core CPI came in at +0.3% versus the +0.2% expected, shifting from 2.4% to 2.6% year-over-year. Its impact was amplified by the proximity of the Federal Reserve meeting scheduled for the 28th.

However, we believe the release was not strong enough to justify another rate hike in October. Beyond the impact of rising energy costs and the effect of AI investments on the prices of PCs, software, and mobile phones, the only aspect to monitor is the uptick in Owners’ Equivalent Rent (OER), which rose compared to the previous month.

The market’s immediate reaction to the data was to push expectations of a 25-basis-point rate hike in federal funds higher: probabilities spiked above 70%, only to quickly retreat to 12.7%, the lowest level since June. The September retail sales data (which deteriorated relative to August), the moderation in import prices shown in the Philadelphia Fed survey, and comments from Mary Daly (San Francisco Fed) and Michelle Bowman—who do not foresee a rate hike this month—exerted downward pressure on that probability, aiding the Treasury bond market. Regarding the U.S. Treasury bond, we do not believe that developments in the neocloud sector, discussed in the next section, were the main driver behind the yield compression. Investment in AI will continue to contribute positively to GDP in the coming months.

AI: Neocloud Strain and Ongoing Adoption

Inflation and its initial effect on the Treasury yield (which exceeded 5.32% on Wednesday before stabilizing near 5.08% on Friday) was also the catalyst for the sharp drop in share prices among neocloud companies. CoreWeave alarmed investors at the worst possible time by communicating that it would like to achieve an investment-grade credit rating to finance its growth on an “unlimited” basis. Its debt fell below 80 (against a par value of 100), having traded at par just a few months ago, while its CDS priced in a more than 50% probability of default over the next five years.

We consider this an isolated case affecting a subsegment of technology companies with higher financial leverage and greater sensitivity to rate hikes, rather than a red flag for the broader set of companies linked to the AI theme.

For now, the adoption of paid AI services among both large and small enterprises continues to advance, rising from 8% in large firms and less than 4% in small ones at the start of 2023 to 67% of large, 62% of mid-sized, and 50% of small businesses today—all within just three and a half years. Moreover, investments are being monetized: aggregate cloud revenues among major compute providers grew 43% year-over-year in the second quarter, based on nearly $370 billion over the last twelve months.

Geopolitics and the “Incompetence Premium” in U.S. Debt

In the short term, the evolution of inflation readings will be determined primarily by geopolitical factors. In this regard, uncertainty has heightened recently: Iran, through its Revolutionary Guard, has intensified threats against vessels that might “illegally” attempt to trade or load oil in the strait. Similarly, the Wall Street Journal reported comments from Iranian authorities regarding the deployment of troops to carry out retaliatory actions against U.S. allies in the Gulf.

As we have been explaining, one of the Iranians’ objectives is to keep the price of crude oil near $100 per barrel to minimize Trump’s chances of retaining control of the Senate as much as possible. However, the escalation in hostilities places Iran in a difficult situation to manage: overreaching in its pressure could hand Trump the justification he needs to strike with greater force once control of both houses is lost on November 3.

A poorly explained war, an imprecise central bank, and Treasury buybacks too small to move the needle have exasperated fixed-income buyers. Some strategists are already referring to an “incompetence premium” impacting the pricing of U.S. sovereign debt.

Woodford, Warsh, and the Abandonment of Forward Guidance

This is why the coincidence surrounding Kevin Warsh’s abandonment of forward guidance—which likely affected the structure of the yield curve—and the Nobel Prize in Economics awarded to Michael Woodford, arguably the academic who put the most effort into establishing a theoretical foundation for that concept, remains curious. The award arrived last Monday, October 12, four months after Warsh dropped the concept in the FOMC statement on June 17. That said, the contradiction is smaller than it appears at first glance.

In Interest and Prices (2003), Woodford argued that monetary policy operates primarily through expectations of the future rate trajectory rather than the rate applied today. At Jackson Hole (2012), he extended that concept to zero-lower-bound (ZIRP) environments. His recommendation was to communicate guidance state-contingent on the economy rather than tied to a calendar date. The Fed implemented this in December 2012 by incorporating unemployment and inflation thresholds into the FOMC statement.

His subsequent work with García-Schmidt (2019) on economic agents planning over finite horizons significantly tempers the impact of long-term projections. Thus, within his own body of work, we find reasons to believe that guidance was less potent than the models suggested.

In reality, the disagreement with Warsh lies in substance, not form. For Woodford, what must be communicated is the central bank’s reaction function to incoming data, not the path of interest rates. Warsh states that guidance has “outlasted its usefulness” and offers instead a “framework” or “roadmap,” provided it is not termed forward guidance. This closely aligns with abandoning the rate trajectory while retaining the reaction function—which is precisely what Wall Street requested.

Furthermore, an important nuance exists: Woodford advocated guidance as a tool specifically when rates are at zero. With federal funds at 3.75–4%, its marginal utility is significantly lower. Therefore, in my view, extrapolating what occurred post-COVID (in 2021, the issue lay in committing to a rate path in an unprecedented environment amid runaway inflation) with Powell’s “transitory inflation” commentary and the resulting loss of credibility would be a mistake.

What occurred then does not prove that communicating the Fed’s reaction function to the market is useless. The risk lies in leaving the market to guess it, which inherently increases uncertainty, noise, and volatility in the fixed-income market.

In summary, the Fed’s reaction function is the rule, explicit or implicit, that translates the state of the economy into a rate decision. Communicating it means telling the market how the Fed decides, without promising what it will do.

Communicating the reaction function establishes the rule: the market continues to react to data, but in the direction and magnitude intended by the Fed—exactly what Woodford advocated. The question with Warsh is whether, in removing guidance, he will also cease to communicate the rule.

Historic Record in Assets Under Management: BlackRock Crosses the $15.5 Trillion Threshold

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Photo courtesyLarry Fink, CEO and Chairman of BlackRock.

In its third-quarter results presentation, BlackRock announced that it has crossed the $15.5 trillion threshold in assets under management (AUM), driven by $869 billion in net inflows over the last twelve months, representing organic growth in base fees of 10%. “These results demonstrate the value of our integrated platform, as clients increasingly choose us as a partner in investment, financing, and technology. That client trust is translating into greater earnings power, with shareholders benefiting from a more than 35% year-over-year increase in adjusted earnings per share, an adjusted operating margin of 47.8%, and annualized organic base fee growth of 11% in the third quarter,” highlighted Larry Fink, CEO and Chairman of BlackRock.

This momentum is reflected in the $205 billion in net inflows recorded during the third quarter and an 11% annualized organic base fee growth, reflecting broad-based strength across iShares ETFs, systematic active equities, private markets, and cash. In this regard, Fink added: “Clients entrusted us with $205 billion in net inflows this quarter, and $869 billion over the past year. Our results reflect BlackRock’s scale, with 12% growth in technology ACV (Annual Contract Value) and net inflows across all asset classes, client types, regions, and in both active and index management.”

Solid investment performance drove $66 billion in active net inflows led by fixed income and systematic franchises, while iShares generated $135 billion in net inflows. “BlackRock brings together issuer relationships built over decades, financing expertise, investment performance, and the technology and data that connect everything. That combination is differentiating us in every region,” commented the CEO, highlighting the securing of mandates at the forefront of capital markets, raising $68 billion in private markets over the past year, and the first deployment of its AI Infrastructure Partnership. “We are entering our seasonally strongest fourth quarter with accelerating momentum and a broad pipeline. Demand for capital is growing across the global economy, and BlackRock is increasingly at the center of how that capital is deployed and managed,” Fink concluded.

Business Lines

On a financial level, investment advisory, administration fees, and securities lending revenue increased by $990 million compared to the third quarter of 2025, driven by organic base fee growth and the impact of market beta on average AUM. Compared to the second quarter of 2026, the increase was $310 million, also supported by the effect of one additional day in the quarter. Within this category, securities lending revenue reached $253 million (compared to $203 million in the third quarter of 2025 and $239 million in the second quarter of 2026), reflecting higher spreads and higher average balances of securities on loan.

On the other hand, performance fees grew by $114 million compared to the third quarter of 2025, primarily due to higher revenues from liquid alternative products related to a single hedge fund, partially offset by lower revenues in private markets. Compared to the second quarter of 2026, these fees increased by $325 million, driven by liquid alternative and private market products.

The firm’s technology business continued its expansion with 14% growth in technology services and subscription revenue year-over-year. In figures, this represented an increase of $73 million compared to the third quarter of 2025 and $22 million compared to the second quarter of 2026, reflecting sustained demand for Aladdin and multi-product solutions, with ACV increasing 12% year-over-year.

Finally, distribution fees experienced an increase of $59 million compared to the third quarter of 2025, an increase directly driven by the company’s higher average assets under management (AUM).

Franklin Templeton Launches First Active UCITS ETF from Putnam Investments

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Franklin Templeton has today announced the launch of the Franklin Putnam Focused US Research UCITS ETF, which it explains is the first actively managed ETF from Putnam Investments in Europe. The firm details that the fund will list on Deutsche Börse Xetra, the London Stock Exchange, and Borsa Italiana on October 15, 2026. In addition, the fund is registered for distribution in Austria, Denmark, Finland, France, Germany, Ireland (country of domicile), Italy, Luxembourg, the Netherlands, Spain, Sweden, and the United Kingdom.

The firm notes that the launch “builds on the strong momentum of Putnam’s investment capabilities in Europe and follows the recent launch of the FTGF Putnam Global Research Fund.” Both new products are based on Putnam’s distinctive investment approach, which centers on stock selection and combines deep fundamental research, collaboration among sector specialists, and disciplined portfolio construction. The new ETF provides access to a more concentrated portfolio consisting of the U.S. equity investment ideas in which the investment team has the highest conviction.

“The launch of Putnam’s first active ETF in Europe represents a new step in expanding our investment offering in the region. European investors are increasingly seeking differentiated alternatives for accessing U.S. equities, and we see significant opportunities to meet this demand by combining Putnam’s investment expertise and track record with the flexibility and accessibility of the ETF format,” commented Javier Villegas, Head of Iberia and Latin America at Franklin Templeton.

In his view, bringing Putnam’s established US Research strategy in an ETF format also reflects their commitment to bringing Franklin Templeton’s full range of global investment capabilities closer to European clients, “offering them a wider variety of strategies and investment vehicles tailored to their needs.”

About the Fund

As explained, the Franklin Putnam Focused US Research UCITS ETF is a high-conviction U.S. equity strategy focused on large-cap companies with a core approach, delivered in an actively managed ETF format. It will invest in between 30 and 45 securities representing the investment ideas in which the team has the highest conviction within the broader US Research strategy, which has outperformed the S&P 500 index in 7 of the last 8 years across both growth-driven and value-oriented markets.

The managers collaborate with sector specialists to develop high-conviction ideas through rigorous fundamental research, which are subsequently integrated into a concentrated equity portfolio. Matt LaPlant, CFA, is responsible for implementing the integrated risk management component in order to mitigate any bias toward specific investment factors or styles. The ETF will be managed by Kate Lakin, Matt LaPlant, CFA, Jackie Cavanaugh, Robert Gray, and Will Rives, CFA, who bring an average of 22 years of investment industry experience.

“The ETF leverages the deep sector expertise of our research team, with stock selection as the core of the investment process. By focusing on our strongest ideas, we aim to generate superior returns while utilizing disciplined risk management to limit exposure to specific factors or investment styles,” explained Kate Lakin, portfolio manager at Putnam Investments.

Vanguard Anticipates High-Growth Macroeconomic Environment Similar to the 1990s Driven by AI Development

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Not one, nor two, but three: three have been the shocks that markets have been experiencing this year. A shock produced by AI, the energy price shock on account of the conflict between Iran and the United States, and, more recently, the sharp correction seen in sovereign debt. Josefina Rodríguez, an economist with Vanguard’s Investment Strategy Group team, recently shared at a media breakfast in Madrid how her firm’s macro vision is articulated around these three shocks. A clue: the central scenario her team’s experts are working with is more optimistic than the consensus, particularly regarding AI.

Artificial Intelligence Shock

Consensus estimates capex spending by major hyperscalers at around 1.3 trillion euros for 2026, a figure that rises to 1.7 trillion looking toward 2027… six times higher than the numbers these companies were handling a year before the pandemic, in 2019. Rodríguez noted that market expectations are high, but added that if these companies actually manage to capitalize on their investments, it will have a direct impact on the real economy and, in turn, drive private investment, particularly in the U.S.

The expert added that Vanguard’s view is that “the investment cycle will be higher and longer than the historical average, and with greater demand.” According to the firm’s calculations, private investment in the U.S. could reach 10%. Considering that investment accounts for 20% of total U.S. GDP, she anticipates that the country will grow next year at a rate of 3%, compared to the 2% anticipated by the consensus.

This optimistic view on AI will obviously be reflected in equities. The economist recalled that the current environment features high valuations backed by solid earnings, “which offer breathing room to face today’s high rates,” and indicated that the consensus forecast for next year is for corporate earnings to grow once again at a double-digit rate.

However, the expert clarified that the trajectory of the AI investment cycle will not be linear. Vanguard’s baseline scenario foresees continued gains at a rate similar to the current one over the next 12 to 18 months, followed by an inevitable market correction triggered by one of these catalysts, or a combination of several:

  • Lack of monetization
  • Commoditization of competition, with high levels of uncertainty driven by the launch of new models
  • Physical bottlenecks
  • Potentially stricter regulation

Energy Shock

The expert described the recent surge in gas prices and Brent crude climbing back above $100 as “a second wave,” referring to the initial peak recorded following the outbreak of hostilities between the United States and Iran. The difference is that this time it has been accompanied by a decoupling between refining margins and crude prices, which is also impacting final consumer prices. Furthermore, she highlighted that the spike in natural gas prices has left Europe in a vulnerable position as it entered this autumn with inventories at very low levels.

How is this energy price escalation impacting inflation? Rodríguez asked to frame the data within the context that major central banks have failed to maintain inflation at their 2% target on a sustained basis over the past five years. For her, the issue is that now the base effect of rising prices is also being channeled via goods-related inflation (transportation, for example), which carries a larger weight in the CPI calculation. Thus, Vanguard forecasts that both the ECB and the Bank of England (BoE) will raise interest rates twice each over the next six months.

The expert also detailed another important consideration when approaching inflation under these macro conditions: the possibility that the neutral interest rate could be higher than in the past. Two main factors would press against financial conditions and justify a higher neutral rate: elevated government deficits and an increase in capital demand from both governments and corporations.

Specifically, the thesis Vanguard is working with is that this neutral rate should sit above 4% in the U.S., compared to the Federal Reserve’s estimate that it should lie between 3% and 3.5%. “This could explain why the Fed has not been able to get inflation back down to its target,” commented Rodríguez.

Bond Shock

The third component of the equation is the recent correction in bonds, with the yield curve under particular pressure at the long end. Here, the economist detailed that Vanguard is working with three baseline scenarios, with its central scenario being the most optimistic of the three: a macro environment similar to that experienced in the 1990s during the expansion of telecommunications, with interest rates near 4% and inflation at 2%. This environment would be marked by AI’s ability to meaningfully boost productivity, driving growth and reducing government deficits. Additionally, the firm considers that part of AI’s transformative power could also impact longevity and healthy habits, translating into a reduction in healthcare expenditures.

The second scenario to which the firm assigns a higher probability is similar to the 1980s: AI is not transformative enough to drive productivity demand with a positive impact, leaving interest rates at 5% and inflation between 2% and 3%. It would also be a scenario marked by higher fiscal pressures.

The final scenario, assigned the lowest probability, would resemble the 1970s: a period of fiscal dominance where the Fed’s margin for maneuver would be narrow, as it could not raise interest rates sufficiently due to fiscal risks. In this scenario, rates would sit at 4% with inflation above 3%, pushing nominal rates above 7%.

Which Assets Could Perform Best?

The final part of the presentation revolved around Vanguard’s estimates regarding performance across different asset classes over the coming decade. The firm expressed a preference for fixed income assets, calculating based on its central scenario that annual returns for both equities and fixed income will hover around 5% per year over the next ten years, making fixed income the alternative offering the best risk-adjusted return.