We live in revolutionary times. The implications of tech disruption, a shift to quantitative tightening and the populist revolt against globalisation are dominating debates amongst investor circles.
This is according to Huw van Steenis, the Global Head of Strategy at global asset manager, Schroders, who says that with many markets near all-time highs and the best synchronous global growth this decade, the focus is as much on the secular trends as the cyclical. How these three transitions play out have profound implications for investors and policymakers alike he says.
Van Steenis explains, "The bankruptcy of Toys R Us, the acquisition of Whole Foods by Amazon, and China banning initial bitcoin offerings have reminded us of the pace of tech transformation. However, amongst all of this change it's important to remember that investing is a marathon, not a sprint.
In the past 10 years, Amazon's market value has grown tenfold and the value of Alphabet, the parent of Google, over threefold. According to van Steenis, the value of Sears, the US retailer, has fallen more than 90%, and that of Staples, the office-supply chain, by half. "Little wonder that half of the investors at a recent Schroders investor conference said tech disruption would have the most impact on their portfolios over the next decade, ahead of quantitative tightening at 32%, although this was the top issue for the next 12 months," says van Steenis. "The implications of climate change came third and the implications of populism came fourth."
He says that margins and profits are shifting at a challenging pace due to tech disruption. "We are well into this change in some sectors - such as music, advertising and books - but in others we are at a much earlier stage."
Working out who's next to be "Amazon-ed" is the topic du jour. "One intriguing question is why financial services has not been disrupted much, at least not yet. Fintech has led to a marked improvement in customer service and a sharp fall in the cost of payments, but it has not unseated industry leaders. However, financiers and policymakers are waking up to the risks of tech disruption, including non-bank companies skimming the cream or the alarming boom in bitcoin," says van Steenis.
Quantitative tightening is the second transition investors need to navigate, he says. "Few interventions in the history of central banking have been as dramatic as the European Central Bank (ECB) and Bank of Japan's expansion of their balance sheets to support their economies. Their balance sheets now represent an extraordinary 80% and 130% of their gross domestic products - well ahead of the Federal Reserve.
"The $2 trillion these two institutions have injected this year have stimulated asset prices and suppressed volatility. History is our database but we have no precedent for money printing on this scale to assess the impact of unwinding $10 trillion of bonds with negative yields. Central bankers are all feeling their way through the fog. So it is not surprising that investors remain doubtful about the pace of rate rises," says van Steenis.
"Behind the scenes, there is growing doubt in central bank thinking. Central banks' bold moves were pivotal to backstopping economies and supporting jobs when they were the only game in town. But the case for emergency rates at the Bank of England or ECB has long since passed."
He goes on to say that quantitative easing has exacerbated inequality. "As asset values for the wealthy have boomed, wage inflation has stagnated. The political economy implications of this are starting to weigh far more heavily on central banks' thinking and are reinforcing the case for re-assessment of emergency rates.
"So who are the winners and losers from rate rises? What could different scenarios mean for portfolios? These questions are not being debated as intensely as they should be," explains van Steenis.
"For instance, higher rates are wind in the sails for banks, with the US speeding ahead. But what may surprise many, is that the growth rate in eurozone bank lending has now caught up with that of US banks, which could help eurozone banks to start to put their lost decade behind them," he adds.
What quantitative tightening means for equities versus bonds is also an unresolved debate, explains van Steenis. "Few investors expected both to rally this year. It is striking that 87% of delegates at the Schroders conference were looking to add more risk to equity portfolios, both public and private."
How the populist revolt against globalisation manifests itself is another transition Western and emerging markets need to navigate. "Investors in the West have long been able to ignore political risk and focus on the prospects of sectors or individual companies. Many hope they can revert to this norm. Exploring how Western populism may affect emerging markets via trade policies as Western countries become more inwardly focused is growing in importance," says van Steenis.
"2017 has been a strong year for emerging markets, after a long period of unpopularity. The recovery is broadening as Brazil and Russia emerge from recessions. How cyclical upswings interact with secular transitions will be critical in the years ahead," he concludes.
All revolutions are fantasy until they happen. We will all need to pace ourselves on how to invest through them.
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