A 'sonnet' capturing the themes of NinetyOne's road map to 2030
Pandemics fast forward history - by Michael Power, Chief Strategist
It was the best of times,
It was the worst of times,
It was the age of wisdom,
It was the age of foolishness,
It was the epoch of belief,
It was the epoch of incredulity,
it was the season of light,
It was the season of darkness,
It was the spring of hope,
It was the winter of despair,
We had everything before us,
We had nothing before us,
We were all going direct to Heaven
We were all going direct the other way..
Charles Dickens, A Tale of Two Cities
“It was the best of times, it was the worst of times” Pandemics fast forward history
The US’s economic expansion was boiling over with Western deficits growing faster than nominal GDP driving Europe and Japan into the unorthodox arms of Modern Monetary Theory (MMT), the printing of money by Governments. “Keynesianism -on- steroids “ was already the Western norm where national debt mountains were being added to and negative and even nominal rates were poisoning the price of risk.
China’s GDP was slowing replacing quantity with quality and the weight of rising consumption in Asia was being felt globally. Carbon was losing out to renewables as climate change fallout grew. Digitalisation was supercharging new tech and revealing its dark side. West versus East demographics were defining their economic futures. Liberal democracy worldwide was falling for the 14th consecutive year.
“It was the age of wisdom, it was the age of foolishness.” Nationalisation
State debt subsidising consumer demand grows sharply in the West with COVID forcing the West to embrace MMT as “there is no alternative .”Negative real interest rates fool governments into believing “debt is free”. Zero yielding government bonds prevent savers from retiring on yield based income . “If everyone does it then everyone can get away from it” logic prevails but this refers only to the West and largely excludes the East. Short term wisdom will be revealed as longer term foolishness. Eventually Western currencies will fall against Eastern ones risking imported inflation being bled into Western price structures. MMT will turn from saviour to villain, as illusory as the Magic Money Tree.
“It was the epoch of belief, it was the epoch of incredulity.” New tech makes things better, but not for everyone
The 4th Industrial Revolution rhetoric creates breathless optimism in the tech space. Taming COVID may dramatically advance medical research. Breakthroughs can be both creative and destructive, think Amazon. Bricks and mortar retail is being crushed. AI is destroying blue and white collar jobs with the “left behinds” joining the “never caught ups”. E-Commerce is revolutionary, though China arguably leads here with the world’s largest research and development programme.
“It was the season of light, it was the season of darkness.” Climate emergency
Climate change is supercharging creativity. Environmental degradation is forcing science to deal with the negative fallout. Deforestation drove COVID infected bats to seek refuge in human habitats. Oil, coal and in due course gas will be de-emphasised with whole industries being transformed, starting with electric vehicles. Hydrogen power is a very real prospect. Demand for key new energy commodities will soar . China has revolutionised long distance electricity distribution.
“It was the spring of hope, it was the winter of despair.” Changing demographics
Aging demographics in the West will weigh heavily on its economic outlook with pensions, both private and public increasingly underfunded. Emergency COVID measures have crushed interest rates meaning nest eggs built on bonds are largely devoid of income. Health systems are increasingly directed to the over 60s.
The contrast with Asia could not be more stark as it enters its savings phase just as the West moves towards the opposite. Consequences for the financial markets of East and West will be profound. The East will now be both the source and application of capital.
“We had everything before us, we had nothing before us.” Asia’s future is bright
The move centre stage of Asia has been hastened by the pandemic with the East coping with COVID far better than the West. This means what would have happened by 2030 will now happen by 2025. China aims to more than merely double its GDP per capita. The rest of East Asia is centering itself upon China. Asian consumption is driven by a fast rising , younger generation as the West struggles with an aging population. Political systems grappling with the rights of the individual versus the collective, financial markets that reward financial engineering more than R&D spend and all this whilst Western surpluses available for redistribution are vanishing.
“ We were all going direct to Heaven, we are all going direct to the other place.” Time for hard decisions
COVID is the catalyst crystallising the themes as we travel towards 2030. Global investment decision making is at a turning point . Home bias is an increasingly costly cop-out; risks do not match the rewards. Western investors need more globalised portfolios to meet targets. For better returns, investors will need to take higher risks globally accessing Eastern growth driven by younger demographics. Understanding comparative country risk will also be required. For this currency management will become a key investment skill. Will currency replace fixed income as an asset class?
Avoiding China and its bloc will be an increasingly costly choice. 2030 is closer than you think. A tough decade faces the West with the COVID hangover difficult to shake off . The recalibration of US-China relationship will lead to a reconfiguration of global power. In the West , MMT and ever higher debt will become the norm until a currency crisis hits after which higher inflation in the West is likely with possible disinflation in the East. The focus of capital markets will swing from the West to the East. Asia will become much weightier in the world of capital.
“Following the light of the sun, we left the Old World.” Columbus as he sailed from Andalusia seeking the western sea route to Asia 1492
Michael Power, Strategist NinetyOne, manager of the St. James’s Place Worldwide Income Fund.
The views are those of the contributor at the time of publication and do not necessarily reflect those of NinetyOne. While opinions stated are honestly held, they are not guarantees and should not be relied upon. All information and opinions are of a general nature. No one should act upon such information without first seeking professional financial advice.