Global economic recovery is not proving completely straightforward. With different countries pursuing very different approaches to the coronavirus (from “zero tolerance” to “vaccinated co-existence”), economies are reopening at different speeds and temporary shutdowns continue. But, despite this, economic growth is back to stay.
One focus remains on monetary policy, with central banks increasingly talking about when they
might shift stimulus down a gear, if the need for it declines. But policy tightening here is not the
game-changer it might seem. Even after promised tapering (and subsequent rate rises) there
will still be continued financial repression – i.e. negative real rates (nominal rates adjusted for
inflation). Government bond yields will remain far below levels normally associated with rapid
growth. This remains an atypical economic recovery.
Focusing just on monetary policy also brings with it the risk of missing other major economic
and social developments. The global economy will be changing gear in many different ways, as
governments, firms and individuals try to adjust to new realities. We can already see much short-term evidence of this – for example the problems in global supply chains (evident, for example, in high shipping rates and disrupted integrated circuit supply).
"The global economy is changing gear in many ways and the process of adjustment will continue. This will remain a supportive environment for risky assets, but it is important not to become euphoric or complacent."
Christian Nolting, Global Chief Investment Officer, Deutsche Bank Private Bank
There is more adjustment to come. We titled our annual outlook for this year “Tectonic shifts”
and pointed out that many structural tensions in the global economy pre-dated the coronavirus
pandemic. Imbalances are relatively easy to measure in areas such as the labour market and
increased public borrowing, but less quantifiable effects may be more important over the
long term – for example, the implications of European stimulus plans for regional integration.
Disruption from the pandemic is also providing the pretext for some fundamental and deliberate
changes of gear on social issues – for example, China’s prioritisation of “common prosperity" over
very rapid growth. China's new priorities, manifest through regulatory change and the reining in of
some sectors (e.g. technology and real estate) already have wide-ranging investment implications.
The need for tougher global action on environmental issues will also likely drive major change: we
are only at the start of this particular road.
Where does this leave investors? Although the investment environment is complex, two things
are particularly worth remembering: most economies are growing strongly and policy (both fiscal
and monetary) will remain generally supportive. So even though many “peaks” (for example
in economic and earnings growth) will soon be behind us, this should remain a supportive
environment for risky assets such as equities, even if one with less dramatic gains than in recent
months. As a consequence, alternative approaches to investing in such “real assets", including
illiquids (e.g. via private equity or venture capital), may well grow in importance. Third, as investors we need to remain innovative and open to new approaches. The growing interest in ESG investment has led to changing evaluations of investment potential and risks. Infrastructure investment, for example, is increasingly assessed in an ESG lifecycle context. Carbon pricing is now having much broader investment implications as countries face up to net zero emissions targets. All this will have continuing implications for how we all assess and respond to the investment environment ahead, even when current growth challenges subside.
In a situation where many issues (social, economic and corporate) remain in flux, it remains
important not to become euphoric or complacent. Central bank and other actions will have an
impact on markets and the potential for policy tensions on monetary policy remains. Geopolitical
risks (for example within Asia, or around U.S./China relations) are also evident. As the global
economy changes gear – in multiple ways – there will be many opportunities but the investment
rules remain the same: stay innovative and open to new approaches, differentiate between
temporary and structural change – and manage risk in portfolios.
Our full CIO Insights report “Changing gear" includes economic forecasts for 2021 and 2022, along with individual asset class outlook summaries and forecasts to end-September 2022. Please refer to the Important Notes at the end of the report for disclosures and risk warnings.
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