Summary
In the last two decades, the global economy experienced major transformations. Here are some of the top stories from the start of the 21st century – and what investors can learn from them.
Key takeaways
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Summary
After months of strong outperformance, US markets may face new challenges, including a resurgent coronavirus and political uncertainty. Our US Investment Strategist has three ideas for investors seeking diversification and growth potential: sustainable investing, private-market debt, and securities in Asia and Europe.
Key takeaways
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Central-bank support first saved the global economy, but then encouraged bad behaviour
What changed in the last 20 years?
Central banks steered the global economy through periods of major upheaval – the dot-com bubble, the financial crisis, the euro-zone crisis – by driving down interest rates and pumping greater levels of stimulus into the financial system. Central banks have maintained this “loose” monetary policy even though economic growth has re-emerged, albeit at a low and slow level. But maybe of more concern, policymakers haven’t been able to create enough inflation globally even though prices have soared for equities, real estate and other asset classes. The markets are now all but “addicted” to central-bank support.
What could the future hold?
Central bankers feel they have no choice but to keep rates ultra-low or even negative, even though this doesn’t leave them much room for manoeuvre when the next recession or crisis hits. They may need to resort to more unconventional tools, such as adjusting their inflation targets or underwriting large increases in government spending. Moreover, politicians still need to fix the underlying structural issues in economies, including low productivity growth, businesses making bad investment choices and steadily rising overall debt levels.
Why does it matter for investors?
Too much monetary stimulus can jeopardise financial stability. When rates are low, risk-taking and debt levels rise, which can cause credit and asset bubbles. And when the economy eventually slows down, companies struggle to maintain their debt burdens and are run for cash – which raises the risk of defaults, lowers investment and can even reduce employment. If central banks can’t fix some of the economy’s deeper problems, governments may resort to fiscal stimulus in the form of increased spending or tax cuts. Central banks may be pressured to finance these initiatives by buying up more debt, raising the spectre of sovereign default if governments are unable to fulfil their obligations.
Disruptive tech survived the dot-com bubble
What changed in the last 20 years?
The 1990s dot-com boom went bust in 2000 when investors saw that high stock valuations weren’t backed up by profits. But the tech sector survived, and it’s prospering today. Mobile computing, e-commerce, cloud computing and social media have transformed how people work and live, and Big Tech companies have become some of the largest corporations in the world.
What could the future hold?
Big Tech firms may become even more powerful unless governments rein in their excesses. Advances in artificial intelligence and robotics could transform entire industries, underscoring the need to evolve our educational system to support a high-tech workforce. New technologies could expand the “sharing economy” (car sharing, holiday rentals, etc) but also grow the “gig economy” as people increasingly turn to online platforms to find employment. As more people work on a day-to-day or project-to-project basis with fewer benefits and job protections, we could see inequality increase further.
Why does it matter to investors?
There are many ways in which high-tech disruptors could be disrupted: investors could discover that some firms have spurious valuations, and governments could cramp their business models with new regulations and new “digital taxes” on e-commerce revenues. Investors will need to use fundamental research and stay active as they seek to separate the winners from the losers.
The tide shifted from deregulation to re-regulation
What changed in the last 20 years?
In the early 2000s, the global economy and financial markets were still enjoying the fruits of decades of deregulation and globalisation. China gained entry to the World Trade Organization in 2001, emerging markets expanded, and deregulation helped companies maximise returns and share prices. But the 2008 global financial crisis stalled this momentum – and Japan, Europe and much of the world has struggled to recover since then.
What could the future hold?
Politics has a cycle, and many governments are feeling pressure to rein in corporations and renegotiate trade agreements to fix what some view as the excesses of the previous decades. We expect to see more re-regulation overall – though not necessarily in the US if President Donald Trump is re-elected. We also expect to see more policies that address the growing inequality of income, wealth and education.
Why does it matter for investors?
As regulations increase, investors should expect lower returns, reduced innovation, and more policy uncertainty and bureaucracy. This could all hurt stock prices.
The US and China moved from globalisation towards nationalism
What changed in the last 20 years?
US consumers helped drive global growth until the US economy slowed. Then China stepped in and powered the world’s economy for a time – although its debt levels skyrocketed as a result. But today, anti-globalisation sentiment is on the rise and the geopolitical environment is growing increasingly tense – particularly between the US and China.
What could the future hold?
Both the US and China will likely focus more on what’s happening within their own borders – as evidenced by President Donald Trump’s call to “make America great again” and President Xi Jinping’s “Made in China 2025” initiative. Even if some US-China trade tensions subside, we expect their relationship to become increasingly strained.
What does it mean for investors?
As more countries operate in their own national self-interest, rather than as contributors to a global economic system, we expect to see slower global growth. Corporate profit margins could also fall as tariffs and wage hikes increase the cost of doing business. Leading exporters will need to change their economic business models – which China is already doing. Global trade is likely to experience more friction, and we could even see currency wars spread as countries devalue their currencies to gain a trade advantage.
Baby boomers gave way to millennials
What changed in the last 20 years?
Baby boomers (born between the mid-1940s and mid-1960s) began retiring by the millions, removing experienced employees from the workforce and straining social safety nets. Meanwhile, millennials (born between the early 1980s and mid-1990s) began entering the workforce in droves, but high student debt levels and stagnating salaries have made it harder for them to save money and buy homes. In fact, data from the Federal Reserve show that when the median age of US baby boomers was 35, they possessed 21% of the wealth of the US. While millennials constitute a smaller proportion of the US population and won’t reach a median age of 35 until 2023, they currently hold only 3% of the nation’s wealth.
What could the future hold?
Economic power may not transfer from boomers to millennials, but political power will. This will continue to change the direction of politics, as shown by the growing concern of millennials about climate change. Over time, younger voters will make their wishes known at the polls and put enormous pressure on corporate management teams and politicians – likely pushing for policies that are less centrist than those of their boomer predecessors.
What does it mean for investors?
Politics and business will continue to be disrupted by the changing consumer patterns and priorities of millennials. This is a dynamic population that is mobile and tech-savvy. Asia in particular is well-positioned to experience a boom that doesn’t come from baby boomers: the median age of the 4.6 billion people in Asia is 32, according to data from the UN. Meanwhile more developed economies such as Japan and Europe are ageing rapidly.
Sustainable investing has reached a tipping point
What changed in the last 20 years?
Sustainable investing has evolved from a trend into an important part of how portfolios should be managed. Investing sustainably means incorporating non-financial inputs – such as environmental, social and governance (ESG) factors – to seek to generate sustainable outcomes as well as strong financial returns. What’s behind this shift? Climate change has been a major motivating factor, but sustainability is broader than that. For example, companies that address issues such as executive pay can help improve their competitive positions over the long term.
What could the future hold?
We expect to see voters pressure governments to find real solutions to climate change. We also want to see shareholders and boards encourage management teams to operate their businesses in a more sustainable way. Asset managers will likely continue to drive capital towards sustainable companies and projects that address what investors view as some of the world’s biggest challenges.
What does it mean for investors?
Investors are seeing proof that sustainable investing can help them manage risk and improve return potential, and we believe that interest in this area will continue to grow. There are many ways to make sustainable investing a core part of an investment approach: incorporate ESG risk factors into decision-making; focus on sustainable and responsible investing (SRI); align with the UN Sustainable Development Goals; or invest for impact by using capital to address real-world issues. Perhaps investors can help jump-start a new “climate race” that results in ground-breaking, productivity-boosting innovations – similar to how LEDs and solar cells came out of the 1960s “space race”.
Traditional long-only investing ceded ground to passive and alts
What changed in the last 20 years?
The US equity market continued its epic bull run, but equity markets in the UK, Europe and Japan aren’t much higher than they were two decades ago. Fixed income has done very well, benefiting from central banks’ largesse, but the global hunt for income continues amid historically low yields. And there has been a dramatic shift in investor preferences across all asset classes as investors flocked to index-tracking passive investments and non-correlated alternative investments.
What could the future hold?
Asset managers will likely feel more pressure to lower costs, and active managers will continually need to prove their worth. But as market returns (beta) fall, investors may increasingly value the excess returns (alpha) that active managers seek to provide.
What does it mean for investors?
In a low-yield, slow-growth environment, investors will need to take risk to earn a sufficient return. This may drive a wholesale rethinking of what constitutes the “right” portfolio construction – but investors must be cautious. They will need to be aware of following the herd into popular investments, particularly as the end of the financial cycle approaches.