The Pride - Issue 5 - Autumn 2021 - Magazine - Page 8
CO VER S T O RY
THE END OF A
GOLDEN DECADE?
David Roberts, Head of the Liontrust Global Fixed Income team, outlines how global
assets have shifted since 2008, why out of kilter markets mean the world is filled with
opportunity, and the biggest question for investors in 2019.
that. Sometimes, though, it is best to take
a longer term view to see where we are
through a long, rather than a wide-angle,
lens. Now may be one such occasion.
DAVID ROBERTS
Since 2008,
global asset markets, bonds, equities
and alternatives have been supported
by Central Banks. This support has
taken many forms, from ultra-low interest
rates and quantitative easing (QE), to
targeted market yields and troubled
asset purchases. Over the past year,
the extent of this support has been
scaled down, first by the US Federal
Reserve, then to an extent by the Bank
of England. Correspondingly, returns
have been more modest. With the
prospect of both the European Central
Bank and the Bank of Japan walking
away from market supporting policies
by the end of 2019, what does this
mean for investors?
Why are central banks scaling down
quantitative easing?
There is often a temptation amongst
private and professional investors to
analyse the latest piece of data to the
nth degree. Indeed, several TV channels
and myriad websites, blogs and Twitter
feeds have been dedicated to doing just
8 - THE P R I DE - Issue 2 Winter 2018
We have grown fat on, and accustomed
to, Central Banks as friends to the
investor. We have not worried about the
downside and thought only of “dips” as
opportunities to buy. Markets may soon
have to stand on their own feet.
Despite the falls in stock markets around
the world in October, investors in most
asset classes who bought in the wake of
the Global Financial Crisis (GFC) have
probably doubled their money or more.
It may have been a long
time in the making, but
since 2015 we have
seen a relentless, upward
march for inflation.
Although there has been some debate
about the effectiveness of QE, most
would agree that cheap money and
negative deposit rates have propelled
asset prices upward. Central Bank
thinking has been that stabilisation of
the financial system would increase
consumer and corporate confidence,
spurring consumption and investment.
This in turn would create inflation and
growth at a time when heavily indebted
governments were unwilling or unable
to stimulate the economy using fiscal
policy (lowering taxes and raising
government spending) when the focus
was generally on austerity programmes.
Now, it may have been a long time in
the making, but since 2015 we have
seen a relentless, upward march for
inflation during a three-year period
of uninterrupted economic growth –
extending the growth cycle into an
almost unprecedented ninth year.
At such a time, we need to bear in mind
most Central Banks have inflation targets
of around 2 per cent, whilst a belief that
inflation is dead has persuaded investors
the easy monetary policy will always
be with us. As the top chart on page
9 shows, in the US, Europe and even
China prices are rising pretty much in
line or even above those targets.
At the same time, if we consider real
growth (after the impact of inflation),
we see that here too economies have
been performing well. Indeed, a real
rate of growth for Western economies
of around 2 per cent is close to both
IMF and World Bank forecasts for future
trends. Neither growth nor inflation
appears to warrant emergency policy
measures – nor have they for some time.
This increase in growth is in part why,
despite all the dire warnings of labour
being replaced by new technology,
we now have unemployment rates
around 4 per cent in the UK and the
US. If the pattern of employment in
Europe continues, the region will hit
multi-decade lows sometime next year.