“Critical junctures are not deterministic; they create opportunities for different choices to be made."
—Daron Acemoglu, author of Why Nations Fail, interview with The Next Web
The world is shifting to a new macro-economic regime. Such critical junctures call for adaption but also offer us opportunities – what kind of world do we want to live in?
We are living in a period of global transition. The pandemic and unwinding of supportive monetary policies have ripped up the economic rule book, and old certainties of investment may no longer apply. What comes next is unlikely to be a return to the ‘normality’ to which we became accustomed after the Global Financial Crisis of 2008.
Regimes are world-shapers, such as the post-war WWII reconstruction, the rise of globalisation and central bank interventions in the years following the Global Financial Crisis of 2008. During each regime, markets assume distinct patterns for prolonged periods as the slow-moving forces of demographics and technology cycles interact with geopolitics and climate change. Variables such as inflation, interest rates and growth oscillate around distinct trends.
Higher, baby
The regime we are now entering – the sixth since WWII – is best characterised by the word ‘higher’. As AI and other technological innovations diffuse into the economy, productivity should pick up. However, inflation will be higher and more volatile, as will interest rates and bond yields. Government deficits will also be higher, partly due to increased spending on defence and the energy transition. And temperatures will be higher. The effects of climate change will become increasingly central to our lives, alongside the implications of ageing populations, the productivity challenges posed by a shrinking global workforce and geopolitical divisions.
Asset returns should be positive, reflecting a higher nominal growth environment. However, they may be somewhat more volatile than many investors expect. This environment should favour an active, forward-looking investment stance. It also plays to the strengths of a more traditional approach to asset allocation that focuses on maximising diversification and the benefits of tactical portfolio tilts, while targeting risk-adjusted over absolute returns.
We do have a choice
Meanwhile, the rate of technological progress is accelerating. This widens our range of potential ‘futures’, making disruption more likely but also offering opportunities to address the social and environmental challenges we face.
The US Inflation Reduction Act (IRA), could allocate $1.2 trillion in incentives to accelerate the transition from fossil fuels to sustainable and green energy. Likewise, the European Green Deal, which includes €1.8 trillion of investment via the NextGenerationEU Recovery Plan, offers a lifeline out of the Covid pandemic and could transform the EU into a modern, resource-efficient and competitive economy.
Failure to recognise that regimes are shifting leaves us adrift and at the mercy of unfamiliar currents, leading to poor investment decisions. This reduces our ability to influence events, shape and create the kind of world we would like to live in.
The art of navigation lies in making informed decisions, and at this critical juncture the decisions we make will be pivotal. Globally, societies face a choice: whether to adopt autocratic, extractive and ultimately socially divisive approaches, or promote inclusive policies that promote individual agency to harness the rapid pace of technological progress.
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