By Mike Dolan
LONDON, Sept 11 (Reuters) – They may not have the rapid economic growth of the 1920s, but the unfolding 2020s are shaping up to be “roaring” regardless.
Just a fleeting glance at global asset prices for 2020 to date would reveal little about the devastating pandemic beyond how it catalysed trends already in place – suggesting more of the same in the decade ahead once COVID-19 is defeated.
But the horizon painted by some investment strategists couldn’t be further from that – at least the one contained in Deutsche Bank’s latest annual long-term asset return study entitled “The Age of Disorder”.
The nub of the thesis by Deutsche strategist Jim Reid and team is that a 40-year period characterised by the second major wave of globalisation in modern history and the best investment returns on record is now ending. The pandemic merely hastens its passing, and a new, more turbulent era means that investment sweet spot will not be replicated over the next decade or more.
Reid and Co divide up the past 160 years into five eras – the 54 years of the first globalisation wave ended by World War One, the 31 years of the two world wars and Great Depression, the post-War period of fixed exchange rates and the gold standard to 1971, and then the inflation and floating currency years of the 1970s and 80s.
Globalisation’s second wave since 1980 – a time when a swelling global workforce depressed western wage growth, inflation, borrowing rates and economic volatility – has run its course, according to Deutsche. Its demise now opens up a more turbulent period – a shift merely hastened by a pandemic that’s accelerated mega-trends already brewing over the past 10 years
“COVID-19 has been a caffeine shot for regime change, hastening the inflection points in demographics, globalisation, liberalism, domestic politics, geopolitics, and asset prices,” Reid wrote in the report released this week.
The themes he reckons will define this new age are already pretty familiar. A battle for supremacy between the world’s top two economies; Europe’s make-or-break decisions on further integration; central banks underwriting ever-higher debt; a possible return of inflation; the fourth industrial revolution in technology and its challenge to workplaces in mega-cities; rising inequality within and between generations and related voter backlashes in favour of higher taxes; and climate protection.
But a striking aspect of the study is how the investment trends of the past 40 years stack up historically and just how stretched they appear.
HISTORIC TROUGH TO PEAK
None of the 15 countries in Deutsche’s sample saw negative nominal or real returns in either bonds or equities in the 40-year period just gone, which saw the best asset price growth of all five eras identified since 1860.
But the historically low starting point in 1980 flatters that result, reflecting as it did the patchy growth, high inflation and modest international trade of the time.
By the bank’s own measure, which captures average bond yields and equity values relative to history, the combined equity and bond valuations for the 15 developed economies it examined were at their cheapest in history in 1980.
They are now at their highest – having surpassing prior peaks at the end of 19th century and in the 1930s.
Advocates of “mean reversion” in markets will only see one direction from here. The coming decade described by Deutsche – with resistance to China’s bid to become the biggest world economy, peaking working-age populations and “Millennial” and younger age groups matching older voters in numbers – adds weight to that.
“The Age of Disorder is likely upon us. In the years ahead, simply extrapolating past trends could be the biggest mistake you make,” the report said. “Lower interest rates mean we can run with more debt, but a high-leverage society is always likely to be more shock-prone.”
Of course, Deutsche isn’t alone in its trepidation.
Famed former hedge fund manager Stanley Druckenmiller, who jointly managed George Soros’s Quantum fund in the late 1980s and early 1990s, told CNBC this week he sees a multi-year “hangover” from the “raging mania” in stocks. And the Federal Reserve’s move to effectively underwrite exploding Treasury debt could see inflation as high 10% within five years, he added.
And yet others are more sanguine about the prospect of disruption.
Fidelity International boss Anne Richards told the World Economic Forum on Wednesday that such big changes are less unusual than people assume, citing huge sectoral churn in benchmark equity indices over the decades.
“Radical change happens more often than we may think – we’re just conditioned to assume status quo will prevail,” she said.
Richards added that more willingness to deal with climate change and sustainability was a big positive and the pandemic has “focused minds” into viewing big systemic threats like climate as very real indeed.
Whether positive or negative, the “Roaring 2020s” will be undoubtedly be eventful. Straight lines on financial charts look less likely.