Chief economist highlights disruptors that are now in plain sight for investors
The global economic outlook is more stable than a year ago but uncertainty lingers. While the general consensus features elements like a post-vaccine boost and a K-shaped recovery, there are a number of “non-standard” themed macro disruptors investors should be on the lookout for.
Frances Donald, chief economist and head of macroeconomic strategy at Manulife Investment Management, said that many of these were borne out of, or made prominent, by the COVID-19 crisis. While confident in Manulife’s base case, she acknowledged that markets could gravitate towards “nascent and unconventional” macro trends in 2021.
1. Monetary and fiscal policy coordination and the blurring of policy roles
The sheer amount of government bonds and the share of the government bond market held by central banks has sparked discussions about whether central banks have been financing government debt.
Donald said this is not a position Manulife necessarily agrees with but that it’s clear the amount of government debt issued has been facilitated by historically low interest-rate policy that most central banks are committed to maintaining.
She added: “It’s also clear that government dependence on low rates and QE programs will add more fuel to the ongoing discussion about debt monetization and modern monetary theory as well as common trade ideas associated with them, such as inflation protection and yield curve steepeners.”
The U.S. Federal Reserve’s transition to average inflation targeting will give the central bank more flexibility to address varied issues because the new framework allows for an overshoot of inflationary pressures when the economy runs hot.
Donald said: “Crucially, we believe the cross-pollination of goals and focus between fiscal and monetary policy suggests central banks could be motivated to keep interest rates very low as they tackle issues beyond inflation. It also implies that global money supply could continue to expand and that government debt and deficits will be persistent. This may seem subtle but, in our view, the development could affect many macro areas and interact in unexpected ways with other emerging macro disruptors.”
2. A growing thirst for alternative investments, including cryptocurrencies
The search for yield given the central bank balance sheet expansion has encouraged investors to venture deeper into alternatives. As well as traditional alternative assets such as private assets, emerging markets, and infrastructure and agriculture funds, Manulife believes there will also be a growing demand for “assets whose value cannot be distorted by central-bank purchases”.
With this in mind, cryptocurrencies will likely be viewed as an alternative investment that offers a solution to fears that this extraordinary policy support could lead to resource misallocation. Donald believes this doesn’t necessarily imply that investments in cryptocurrencies are appropriate, but it does suggest that cryptoassets such as Bitcoin will become more of a standard point of reference for investors and policymakers.
3. A shift away from traditional data
Traditional data sets—most of which are lagging indicators—proved to be too lagged and distorted to be meaningful in a rapidly changing pandemic environment. To compensate, analysts turned to new and, occasionally, private sector data such as OpenTable restaurant reservations, Google’s mobility indexes, and cross-border visitor arrival data for a read on the economy. These aren’t without faults, but they proved to be useful.
Donald said: “We believe investors will continue to demand more timely data that can provide an instant read on economic conditions, and this private sector data will become a critical building block of macro views from here on. We also expect markets to have more muted reactions to traditional economic data releases than they might have historically.”
4. Central bank digital currencies
We suspect central banks will intensify existing efforts to better understand digital currencies, specifically central bank digital currencies (CBDCs), which refer to the system in which a digital currency is distributed, one that’s backed and controlled by central banks (i.e., it doesn’t rely on blockchain technology and isn’t a cryptocurrency). The construction of a CBDC system could take a lot of forms, but the idea is often associated with the concept of a digital wallet held by end users, which could include households or businesses.
5. ESG investing to expand into the macro universe
Manulife expects investors who are increasingly ESG aware to move beyond examining how individual companies are tackling these issues and focus on how economies are approaching sustainability, equality, and diversity challenges.
Donald said: “This will likely create additional pressure on governments — and central bankers — to focus on topics such as climate change and how to transition to a low-carbon environment.”
6. Labour market scarring
With COVID-19 vaccines already being distributed and unemployment rates having bounced off historic lows, it’s tempting to think that life could return to normal in short order. While that’s true for many pockets of the economy, the full picture is more complex.
Donald explained that one area that bears careful monitoring is the relatively substantial drop in the labour force participation rate (LFPR) in many countries that occurred in 2020, which points to potential longer-term scarring of the labour market. Major central banks have extensively studied the concept of hysteresis, or the persistent economic harm, particularly among disadvantaged groups.
7. Populism and demand for redistributive policies
Donald said: “In our view, there’s scope for the [populist] movement to grow, particularly since COVID-19 turned the spotlight on the extent of racial, gender, and wealth inequalities that were somehow hidden in plain sight — pressure to address this imbalance will likely grow.
“In Europe, we’re keeping an eye on the upcoming German federal election in September, along with the Italian and French elections of 2022, during which populist parties could win a bigger share of the electorate’s vote. But Europe isn’t alone — we believe demands for redistributive policies will grow in many major economies, with implications for the size, scope, and effectiveness of fiscal policy.”
