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In my last blog post, I asked, “Is this the end of secular stagnation?,” which I defined as low nominal economic growth due to insufficient aggregate demand. While I didn’t (and still don’t) have a simple “yes” or “no” answer, I shared my latest thinking on the topic, including some investment positioning ideas for clients.

This time, I’d like to look more closely at one of the main causes of secular stagnation — a global “savings glut” over the past decade-plus — and whether it’s likely to persist going forward.

How did we end up with a savings glut?

Outside the US, the “savings glut” to which I refer dates back to before the 2008 global financial crisis (GFC). Following the GFC, the US also began to accumulate…

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Brij Khurana
Brij Khurana
Fixed Income Portfolio Manager
Boston

The short answer is no, but it’s not completely hyperbolic to suggest we could be heading in that direction longer term.

Several of my Wellington colleagues and I are collaborating on an ongoing macroeconomic and geopolitical research project around the theme of “Biden and the world.” This blog post encapsulates some of my latest contributions to that effort, with a focus on the US-China relationship and the latter country’s growing role on the world stage.

China could become the world’s largest economy on President Biden’s watch.

According to the International Monetary Fund, the US was the world’s biggest economy as of year-end 2020, with a nominal gross domestic product (GDP) of US$20.8 trillion, followed by China at US$14.9 trillion. However, a December 2020 report by the Centre for Economics and Business Research stated that the size of China’s economy could surpass that of the US by…

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Santiago Millan headshot
Santiago Millán
CFA
Macro Strategist
Hong Kong

The dramatic 2020 US election is finally behind us, but 2021 is not lacking in global political activity of which investors should be aware. For example, the new year brought a busy docket of upcoming elections across various emerging markets (EM) countries. Figure 1 provides our EM debt team’s 2021 election calendar and assessment of the risk of populism in each case.

FIGURE 1

2021 EM elections calendar

Important takeaways

  • Across large parts of the EM landscape, economic growth had already been weak for several years leading up to the COVID-19 crisis. We believe the pandemic’s…
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Tushar Poddar
Tushar Poddar
PhD
Macro Strategist
London

Momentous changes have taken place in India over the past 12 months that I believe have helped to fast-track the country’s nascent growth story. It’s now clear that Indian Prime Minister Narendra Modi is going all out to spur an economic renaissance.

Pre-COVID-19, there were some initial signs of positive policy reform in India, notably a substantial corporate-tax cut in 2019. Post-COVID, the Indian government has stepped up these efforts, announcing a flurry of key economic initiatives, including:

  • Farm-sector and labor-market reforms;
  • A potentially huge production-linked incentive scheme;
  • Increased spending on the country’s physical infrastructure; and
  • The unprecedented policy of privatization of public-sector enterprises.

Most recently, the presentation of the country’s annual budget on 1 February 2021 and Prime Minister Modi’s speech on 11 February left no doubt as to his intentions. Never before has…

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THEMES
Niraj Bhagwat
Niraj Bhagwat
CA
Equity Portfolio Manager
Singapore

My previous inflation-related blog posts have focused on the debate around the threat of rising inflation going forward and on the potentially disruptive portfolio effects of higher inflation, particularly how it can upend the traditional equity-bond relationship in client portfolios. This time, I’d like to: 1) explain why the specific source of the inflation matters; and 2) provide a “playbook” of sorts to help asset allocators monitor and mitigate inflation risk based on its source.

Consider the source of inflation

Many investors use standard inflation indices, such as the Consumer Price Index (CPI) or the Producer Price Index (PPI), to track changes in inflation over time. While useful to a degree, these broad indices are only intended to serve as…

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Nick Samouilhan
Nick Samouilhan
PhD, CFA, FRM
Multi-Asset Strategist
Singapore

Hopes and expectations for generous fiscal stimulus to be delivered by the Biden administration are largely baked into the current market narrative. More broadly, the ongoing COVID-19 crisis has provided fresh justification for many of the social and economic policies long proposed by US Democrats — health care for all, stronger safety nets, entitlement protections. For the most part, I have viewed such proposals as fodder for future negotiations with Republicans, but as politically unrealistic given the partisan divide in Washington.

However, I now believe there’s a big paradigm shift in the making. It’s becomingly increasingly clear to me that economists close to the new administration want to fundamentally redefine how people think about government spending and responsible fiscal policy. If they can rewrite that narrative, so to speak, it could be…

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Jeremy Forster
Jeremy Forster
Fixed Income Portfolio Manager
Boston

My team and I often say recessions wipe the slate clean and create new investment patterns that will likely be dissociated from the last cycle. If there was a dominant theme of the last cycle — from the global financial crisis (GFC) in 2008 up to the onset of COVID-19 in March 2020 — it may have been “secular stagnation,” which I define as low nominal economic growth due to shortfalls in aggregate demand. Naturally, this begs the question of whether or not secular stagnation will still have legs in the post-COVID era.

I don’t claim to have a simple “yes” or “no” answer yet, but for now would like to share my latest thinking on the topic, to be followed by deeper dives on specific aspects of it (and hopefully more definitive answers) in additional blog posts throughout 2021.

Whence secular stagnation?

By way of context, it’s helpful to consider how we got here in the first place. Economists have attributed secular stagnation to…

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THEMES
Brij Khurana
Brij Khurana
Fixed Income Portfolio Manager
Boston

As he enters the Oval Office, US President Joe Biden faces a full inbox of post-Trump challenges. One area where I expect some strong wins is in his relations with the European Union (EU). Here, I look at three potential benefits of his presidency.

1. Improved and more predictable US trade and foreign policymaking will reduce macro uncertainty and risks.

A year ago, markets were worried about a full-blown trade war between the US and Europe and a breakdown of the global trade order. With the new US administration, European exporters should benefit from increased predictability in policymaking in all spheres and thus reduced volatility, even in a world where the US and China remain in strategic competition. EU firms with a large presence in the US or with global supply chains or markets will see…

The current state of global equity markets is one of the frothiest I can find historically, in terms of both long-term valuations and short-term sentiment. Of course, there’s a compelling story behind this: Central banks are distorting asset prices, rendering traditional valuation metrics unreliable. Aided by this monetary (and fiscal) support and the likelihood of economies opening up later this year, 2021 should be a year of strong growth. And a long series of inflation undershoots means monetary policy likely won’t tighten on a near-term growth pickup.

These are earmarks of a classic “Goldilocks” scenario. It’s a powerful narrative for asset prices and, frankly, one that’s hard to refute. Yet it’s become more and more consensus. When investor optimism is running this high, it’s often a good time to pause and at least consider what could go wrong. Here are five potential risks to keep an eye on in the coming months…

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MARKETS
Nick Petrucelli
Nick Petrucelli
CFA
Portfolio Manager
Boston

With the Democrats having secured a narrow sweep of the White House and Congress, where will the new Biden administration set its policy focus? We know that pandemic control and economic stimulus will be top priorities, and I expect climate change, trade, and inequality to be on the list as well — with a range of investment implications.

Starting with the health and economic crises

In his January 14 speech, Biden made it clear that he sees a need for more stimulus, as he rolled out a US$1.9 trillion proposal. The new president’s negotiating skills will be tested as he works to move the proposal forward, and the details and dollar amounts will surely evolve. Ultimately, I think the next package will come by March 14, when unemployment benefits are set to expire. In addition to an extension of those benefits, the package could include a third round of stimulus checks, more state and local aid, and an extension of the eviction moratorium. In addition, I would expect more…

MACRO
Juhi Dhawan headshot
Juhi Dhawan
PhD
Macro Strategist
Boston
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With an unstable relationship between the US and China looking like a long-term geopolitical reality, pressure to relocate manufacturing away from China is growing. Could neighbouring India, which has a similar population size and rate of economic growth, be positioned to benefit from the shift?

I believe this is not a realistic expectation. Understanding why requires a quick recap of India’s industrial history.

Constructing — and dismantling — the socialist edifice

In the decades after India gained independence in 1947, while East Asia was opening up to the rest of the world, Indian manufacturing stagnated under a series of protectionist trade policies and a socialist industrial model that stifled competition, discouraged innovation and encouraged downsizing rather than expansion. Labour was protected to the point of dysfunction, while education and skills languished in the hands of a corrupt and inefficient bureaucracy. India’s location did not help — in a historically poor region far from key sea routes, with poor connections with the West and East Asia.

Reform came in the early 1990s when a spike in oil prices sparked by the Gulf War coincided with a trough in remittances from Indians in the Gulf. With FX reserves for imports and debt servicing running dangerously low, a desperate Indian government secured an emergency loan from the International Monetary Fund in 1991. In exchange, the government implemented sweeping reforms to open up the economy.

By the 1980s, India’s growth was accelerating fast. But it was arguably too…

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Tushar Poddar
Tushar Poddar
PhD
Macro Strategist
London

I was strongly bullish on Russian equities for most of 2020, but have become decidedly more cautious on the market of late. Why? Potential controversy around the upcoming US election is one reason, but there’s more to the story.

First, the good news

I recently spoke with 16 Russian companies across the financial services, internet, telecom, retail, steel, and oil & gas industries. The good news is that Russia’s economic activity is rebounding, while both corporate and consumer sentiment are inching higher. In addition, the risk of a second COVID-19 wave hitting Russia appears to be relatively low as of this writing. Here’s a cross-section of the sanguine comments I’ve heard from company executives lately…

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Jamie Rice
Jamie Rice
CFA
Equity Portfolio Manager
Boston

The upcoming US election is arguably the biggest near-term risk facing global markets right now. Questions continue to swirl around both the election process and the potential outcome, not to mention the looming specter of post-election controversy if it appears that President Trump has lost. The large number of mail-in ballots could mean delayed results and legal challenges, perhaps even civil unrest.

In addition, risk markets would be inclined to initially react poorly to a “blue-wave” scenario where Democrats win the White House and control both houses of Congress, which would likely pave the way for higher corporate taxes and increased government regulation. As of this writing, that looks to be a…

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Nanette Abuhoff Jacobson
Nanette Abuhoff Jacobson
Global Investment and Multi-Asset Strategist
Boston

Baseball legend Yogi Berra famously remarked that “it’s tough to make predictions, especially about the future.” Political elections are no exception, of course. But as difficult as forecasting an election can be, predicting market reactions is arguably even more challenging. That being said, with the 2020 US elections only a few weeks away, now seems an opportune time to think through the various potential outcomes and their implications for fixed income and currency markets.

While most market participants are focused on the presidential election, which party controls the Senate is of equal importance in the event of a Biden victory; it matters less under a Trump presidency given that Democrats control the House of Representatives, with little chance of a flip there. Thus, the three possible outcomes to consider are…

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Brij Khurana
Brij Khurana
Fixed Income Portfolio Manager
Boston
Joe Marvan
Joseph Marvan
Fixed Income Portfolio Manager
Boston

I think the US Federal Reserve (Fed)’s newly unveiled framework for its long-run goals and monetary policy strategy, combined with its recent statements, signals a fundamental change in how the central bank will conduct monetary policy from here on.

Prior to the 2008 financial crisis, the Fed would tend to hike interest rates when the unemployment rate fell below NAIRU.1 The Fed’s latest statement made clear that this is no longer a sufficient reason to raise rates, unless accompanied by inflation exceeding its target in order to deliver a 2% average inflation rate.

A closer look at the new framework

In general, the communique was dovish in that the Fed is basically saying that it will need to see both low unemployment and above-target inflation before it will consider hiking rates. The Fed’s policy rate is likely going to be…

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Brij Khurana
Brij Khurana
Fixed Income Portfolio Manager
Boston

COVID-19 impact on global supply chains

Localization. Digitization. Industrial protectionism. In the wake of COVID-19, the world is eager to form more resilient supply chains. These efforts could affect a range of industries as well as fiscal and monetary policy. In this 17-minute audiocast, Geopolitical Strategist Thomas Mucha speaks with members of our Global Macro Team about the future of global supply chains.

video-iframe

CORONAVIRUS
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Juhi Dhawan headshot
Juhi Dhawan
PhD
Macro Strategist
Boston
Jens Larsen headshot
Jens Larsen
PhD
Macro Strategist
London
Thomas Mucha
Thomas Mucha
Geopolitical Strategist
Boston

The Federal Open Market Committee’s (FOMC)’s September statement and press conference did not deliver any big surprises. The upshot is that the US Federal Reserve (Fed) appears to be committed to maintaining its “dovish” monetary policy stance for the foreseeable future.

Look no further than the Summary of Economic Projections (SEP), released in conjunction with the FOMC meeting minutes, in which the majority of participants indicated that Fed policy rates should remain around zero through 2023. This was largely expected, given the recent shift in the Fed’s inflation framework: Whereas the Fed has historically targeted an average inflation rate of 2% over time, under the new framework, the Fed could allow inflation to…

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Jeremy Forster
Jeremy Forster
Fixed Income Portfolio Manager
Boston

The US election runup has begun in earnest. With the Democrat and Republican conventions behind us, the presidential debates coming up, and less than two months to go until voters cast their ballots, investors around the world are increasingly asking how this momentous event may affect the economy and markets. Here are some of our latest thoughts, including how investors might position for November and beyond.

Sizing up the presidential race

Based on the latest polling (which isn’t foolproof), Trump is trailing Biden in the national polls by around eight percentage points and by an average of five points in key swing states like Florida, Pennsylvania, Michigan, and Wisconsin. With his…

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Nanette Abuhoff Jacobson
Nanette Abuhoff Jacobson
Global Investment and Multi-Asset Strategist
Boston
Michael Medeiros
Michael Medeiros
CFA
Macro Strategist
Boston

It’s no secret that the US and China have been “decoupling” from one another, in keeping with the broader deglobalization theme that has been underway for some time now. The decoupling is occurring across a variety of vectors — goods and services, people, ideas, technology (see my last blog post on that topic) — and should only continue to gain traction going forward.

Supply-chain migration

One of the most talked-about forms of US-China decoupling is that of supply-chain migration. China’s role in global supply chains is gradually becoming…

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Santiago Millan headshot
Santiago Millán
CFA
Macro Strategist
Hong Kong

In my last blog post, I described how the shifting composition of the US equity market over the past 20 or 30 years has caused the S&P 500 Index to look more and more like a bond every day. Broadly speaking, there is now a far greater percentage of companies with “annuity-like” profits – recurring, scalable, and not capex-heavy to maintain.

This evolution has potentially important implications for the relationship between bond yields and stock prices. In short, I argued, a case can be made that low yields (like today’s) do in fact justify high stock prices (again, like today’s).

The more I think about it, the more sense it makes. After all, with government bonds and other areas of fixed income sporting record-low yields in today’s environment, why wouldn’t income-oriented investors…

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Connor Fitzgerald
Connor Fitzgerald
Fixed Income Portfolio Manager
Boston
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