Darkness to Light: A New Economic Renaissance Beckons

The decade following the global financial crisis (GFC) was marked by fiscal conservatism, below-average economic growth, low productivity growth, low private sector investment, structural unemployment and fears of deflation. Most would agree that it also had a more limited focus on improving important societal issues of income inequality and environmental sustainability.

We see three dramatic shifts ahead, each of which is transformative. Taken together, they could create a strong catalyst for growth, productivity and investment, while also addressing significant societal change:

1. Economic Regime Shift: Major economic powers led by the US and China are embracing fiscal activism, with less concern for debt and deficits, to create a more sustainable, inclusive and durable trajectory of economic growth.
2. Release of Pent-up Demand Post-Covid: As vaccines become widely distributed, consumers and businesses will have a chance to re-normalise, triggering demand for spending prevented by a society in lockdown.
3. Innovation & Sustainable Investment Supported by Benign Liquidity: The pandemic has accelerated digitalisation and the need for sustainability. Public and private investment will be catalysed in both areas, fuelled by accommodative liquidity and record-low financing costs.

The combination at some point in 2021 and beyond could create a positively reinforcing cycle:

Above-average GDP growth leads to rising earnings; rising earnings means companies can pay more; rising incomes and pent-up demand create more growth; growth encourages companies to invest; governments prioritise and enable further investment; investment leads to more growth, jobs and higher labour-force participation; jobs increase incomes while investment and innovation boost productivity; and finally, rising productivity keeps inflation at bay.

A combination of above-average economic growth and low inflation is positive for growth assets, namely equities in both public and private markets. And since central banks are focused on creating some inflation along the way, equities also benefit from what is likely to be a move away from fears of deflation to an acceptance of gradually rising inflation with a medium-term view.

There are, of course, risks, not least the fact that the pandemic is far from over. The challenge of vaccinating a global population should not be underestimated, particularly as more virulent mutations emerge and contagion grows higher. Consider that it took 11 months for infections worldwide to reach the 50 million mark, while the threshold of 100 million cases was reached just three months later.

Investors will also worry about the possible risk of increases in inflation and rising debt and deficits. These and recent clear signs of speculative activity and overvaluation in some areas of the market will keep investors on edge and lead to periods of market volatility and consolidation.

However, we do not believe these risks will derail the potential for significant innovation and economic change in the decade ahead. In the piece below, we elaborate on how we are positioning portfolios to benefit from these themes. Our key message is that clients should maintain their recommended allocation to risk assets in both public and private markets, but also use a range of diversification strategies to buffer periods of market dislocation.

This is a time to reap the benefits of growth and participate in a more inclusive economic renaissance ahead.

Economic Regime Shift

Any pretence of fiscal austerity died by necessity with the pandemic, but more importantly so did the economic tenets of the post-GFC world. In an effort to stave off the worst effects of the crisis, developed world governments embraced fiscal and monetary accommodation in an unprecedented way. Morgan Stanley (see chart below) calculates that last year the US committed a median sum equal to 33% per cent of GDP to stimulus measures, shattering the mark of 20% set back in 2008. Debt levels in the US and the UK, for example, have reached their highest level compared to GDP since World War II. In numeric terms, the G20 has provided around US$11trn in necessary support to individuals, businesses and the healthcare sector since the start of the pandemic.

See article download for additional graph.

But fiscal spending is not just focused on a post-Covid economic recovery. A new acceptance of the role of fiscal activism to promote more sustainable and inclusive long-term growth has taken hold.

In the words of the IMF:

‘As we begin to gradually understand what’s in store in the post-pandemic world, policies will need to be geared towards long-term growth and resilience. For instance, policies that promote investment and hiring in expanding sectors and provide reskilling and training opportunities to the unemployed will strengthen the recovery and make it more sustainable. Investments to promote decarbonization cannot only lift employment in the near-term but also increase resilience down the road. The road to strong, sustainable, balanced and inclusive growth is the opportunity created by this crisis. Now is the time to embrace fiscal spending to build for a more durable economic future.’
Advocates of the so-called Modern Monetary Theory (MMT) have become more vociferous, arguing that, for specific countries, debts and deficits do not matter when economic growth is below capacity and societal challenges remain.

‘Fiscal policy provides a more targeted path to lifting aggregate demand and can promote better longer-term macroeconomic efficiency, fairness and equality, and investment. MMT makes the case for mobilising productive capacity because the real costs of slack can exceed the financial costs of debt. Further, in ‘liquidity trap’ conditions near the lower-bound for rates, mainstream economists now agree that deficit spending can lower the debt-to-GDP ratio over time as income effects dominate interest effects: in short, budget deficits pay for themselves. The only binding constraint to fiscal expansion is not interest rates, still less solvency, but rather inflation, which for the moment is nowhere to be seen.’ –– Renaissance Macro Research
Nowhere is this message clearer than in President Biden’s new economic proposals, echoed powerfully by Treasury Secretary Janet Yellen. The incoming administration argues that low rates liberate governments to borrow and spend in unlimited amounts for the foreseeable future. On taking office, Biden has made his fiscal ambitions clear: a two-phased fiscal expansion to not only support a post-Covid economic recovery in the US, but also to invest in a more durable recovery ahead:

1. Phase I: The American Rescue Plan is geared towards a strong, sustainable and equitable recovery. Biden’s ask is $1.9trn. The plan includes $20bn in Covid vaccine distribution funding and $50bn for testing expansion. It increases the income support to $2,000 and calls for the minimum wage to be lifted from $7.25 to $15 per hour. The ambitious plan has a dual mandate of supporting a strong jobs recovery after the Covid crisis while reducing inequality.
2. Phase II: The Build Back Better Plan is aimed at a range of government investment initiatives in infrastructure, manufacturing, innovation, research and development, and clean energy. The aim is to increase the long-term growth potential of the US, improve productivity and competitiveness, and place sustainability squarely back on the American agenda. The plan will be presented next month before a joint session of Congress.

In total, President Biden has outlined an incremental $5-6trn in government spending, on top of the $3trn in stimulus already provided last year. This would bring total US fiscal stimulus close to $10trn, more than the combined GDP of Germany and Japan.

Now, Biden won’t get everything he wants, but his party’s recapture of a majority in the Senate means that Democrats now control both houses of Congress. It is likely a smaller version of stimulus garners some form of bi-partisan support. Biden can also resort to budget reconciliation, which allows for passage of certain budgetary proposals in the Senate with only a majority as opposed to the usual two-thirds vote. Many forecasters now expect an additional $1.2trn of fiscal stimulus in Q1, lifting US GDP to around 6-7% in 2021, from earlier estimates of 4-5%. Further stimulus will add to the US growth trajectory, if approved.

Janet Yellen, who is widely respected in Congress, will be a powerful ally to the cause:

‘Neither the president-elect, nor I, propose this relief package without an appreciation for the country’s debt burden. But right now, with interest rates at historic lows, the smartest thing we can do is act big. In the long run, I believe the benefits will far outweigh the costs, especially if we care about helping people who have been struggling for a very long time.’
The concomitant focus on economic growth, sustainable investment and a more equitable society could not be clearer:

‘We have to rebuild our economy so that it creates more prosperity for more people, a more sustainable future ahead, and an investment in jobs and innovation to ensure that American workers can compete in an increasingly competitive global economy.’
As expected, one of Biden’s first moves was to take America back into the Paris Accord. His green agenda has two sequential goals to reduce US emissions:

1. His first goal is to have a carbon-free electricity grid by 2035. Right now, a little less than two-thirds of US electricity are powered by natural gas and coal.
2. Biden’s longer-term goal is to have a net-zero carbon economy by 2050. At the moment, about 80% of domestic energy consumption and production come from oil, natural gas or coal.

The path to carbon neutrality is herculean and will require literally trillions in public and private investment over the next decade. Not all of these goals will be achieved. However, the Biden administration will be keen to show progress before mid-term elections in two years’ time.

For the moment, even the prospect of tax increases has been watered down:

‘President-elect Biden doesn’t support a complete repeal of the Trump tax cuts; he wants to pursue a somewhat higher corporate tax and change provisions rewarding companies for moving their operations offshore. The first priority, however, is the American recovery.’ –– Janet Yellen
Financing deficits is not a problem in a low-interest-rate world. US Federal Reserve officials have signalled that they will keep interest rates near zero until at least 2024 and pledged to continue buying bonds at a monthly rate of at least $120bn until ‘further substantial progress’ has been made towards reaching full employment and inflation of 2%. As Chairman Powell stated in January:

‘When the time comes to raise interest rates, we’ll certainly do that, and that time, by the way, is no time soon.’

Global central banks have echoed similar themes. For having struggled to maintain enough economic activity to prevent inflation falling significantly below their targets, they have either explicit or implicit policies in place to keep borrowing costs at rock bottom well into the recovery phase.

Larry Summers recently pointed out that financing costs for the current level of US debt to GDP of 100% are equivalent to 20 years ago when debt to GDP was 33%. The maths has not been lost on central bankers.

Meanwhile, China is experiencing a V-shaped economic rebound, and this puts the world’s second-largest economy in a strong position to invest in line with its strategic priorities. China’s GDP expanded 6.5% in the fourth quarter of 2020, beating forecasts and making the country one of the few in the world to register growth for the year. GDP growth is expected to rise even higher in the first quarter of 2021 when the relevant comparison will be with the nadir of its Covid-19 crisis last year.

China, which has arguably dealt with the pandemic more successfully than the world’s large democracies, will hail victory in this year’s celebration of the Communist party’s centenary. In line with its five-year plan, China is also looking to continue to invest to achieve a range of lofty ambitions. It hopes to:

1. Rebalance its economy more towards consumer led growth
2. Achieve its goal of technological supremacy and supply side resilience
3. Reach carbon neutrality by 2060

Goldman Sachs estimates that China could spend close to $16trn on clean technology and infrastructure to achieve its sustainability goals. Importantly, the country also wants to professionalise its financial services sector to promote availability of retirement products and savings vehicles for its ageing population. It has prioritised foreign capital inflows and robust financial markets to achieve its goal of rotating household wealth out of property and into equities.

Economists such as those at Credit Suisse have upgraded their forecasts for China’s 2021 growth to 7.1% from 5.6%, pointing to consumption and investment as the main drivers of incremental growth, and indicating that China’s growth trajectory will be back on track for above-average economic growth in the years ahead.

We believe that the US and China will lead the global recovery. We also cannot remember the last time the world’s largest economies embarked on fiscal activism at the same time. If estimates of an incremental 2-3% GDP growth each are correct, then the US and China combined are likely to add a further $1trn to global GDP as the pandemic ends and these investment and spending initiatives take hold.

After the GFC, the US led the world in the unprecedented use of quantitative easing (QE). We think it is only a matter of time before other developed nations join suit in fiscal spend. This may be hardest in Europe, where EU institutions are still grappling with division between ‘northern’ views on austerity and ‘southern’ views on the need for a more integrated and expansionary fiscal policy. Disbursement of the €750bn recovery fund has been slow; but as with the QE policy shift, time has a way of bringing the EU along.

As Bruno Le Maire, French Minister of Economy and Finance, recently put it:

‘Rules, while essential for the 19 eurozone members, should be re-evaluated to take into account reality — and that reality is: the highest debt levels in our history, the lowest interest rates in our history, and the largest investment needs in our history.’

Release of Pent-up Demand

The world may be surprised by the amount of ‘additional’ economic growth that comes from pent-up demand once life begins to return to normal. Several factors are worth considering:

1. The US is currently sitting on a massive saving rate that has doubled in one year, with more than $2trn in excess savings.
2. US companies are sitting on trillions of dollars in cash that they borrowed to survive the coronavirus shock. The healthiest might now choose to invest, especially if the outlook for growth improves.
3. Meanwhile, it has never been cheaper for companies to borrow. The average yields on bonds issued by both riskier high-yield borrowers, and safer investment-grade companies, are either at or around record lows.
4. So far, the pandemic has been kind to wealth; the net worth of US households rose to a record in the fourth quarter of 2020 as the value of stock portfolios and real estate also increased.
5. Meanwhile, ample liquidity supports growth: M2 money rose by 24% in the US in 2020. Much of this liquidity found its way into capital markets and, looking forward, it could also find its way into the real economy, increasing velocity of money in circulation.
6. Indeed, banks could increase lending as they release loan loss provisions. Citigroup, JPMorgan Chase and Wells Fargo have recently released more than $5bn of loan reserves. The three banks took more than $31bn in loan-loss charges in the first nine months of last year amid fears that the pandemic and related shutdowns would prompt mass defaults among borrowers. As reserves get released, banks have additional capital to lend.
7. With inventory levels at record lows, companies are going to need to gear up for a recovery.

Any or all of these factors in combination could unleash a strong impetus for growth as and when business and consumer normalcy resumes. Pent-up demand for all things deprived during lockdown should boost travel, leisure and hospitality. Working from home will continue, but businesses will be keen to see clients and customers again as we return from Zoom to an in-person world. The magnitude and types of demand that benefit most remain to be seen and there are countervailing forces: have we learned to live with less, for example, and do we want to pursue a healthier lifestyle post-Covid? Have our priorities around spending changed?

The post-pandemic economy will no doubt create winners and losers, as well as new trends. But what is clear is that pent-up demand creates spending – and for the beneficiaries, better prospects can incentivise companies to invest.

Innovation & Sustainable Investment

The pandemic has accelerated the acceptance of all things digital. One has only to look at how quickly the global population has adapted to a world of virtual interaction and collaboration in every aspect of life: work, socialising, education, healthcare, banking, shopping and entertainment.

The move to 5G, the increasing power of artificial intelligence and the adoption of the Cloud, to name but a few advancements, will contribute to a foundation of greater speed, innovation and technological change. Ample liquidity and low financing costs serve to ‘grease the wheels’ of change in both private and public markets. New innovations, technologies and ideas are likely to spawn at a faster rate than ever before.

Some liken the outlook ahead to the Fourth Industrial Revolution. As Jen-Hsun Huang, CEO of Nvidia so aptly pointed out:

‘A powerful fusion of capital, technology and demand will usher in a technological revolution that will fundamentally alter the way we live, work and relate to one another.’
In the words of Professor Klaus Schwab, head of the World Economic Forum, this revolution will bring both economic and social change:

‘It is a new chapter in human development, enabled by extraordinary technology advances commensurate with those of the first, second and third industrial revolutions. These advances are merging the physical, digital and biological worlds in ways that create huge promise. The speed, breadth and depth of this revolution is forcing us to rethink how countries develop, how organisations create value and even what it means to be human. The Fourth Industrial Revolution is about more than just technology-driven change; it is an opportunity to help everyone, including leaders, policy-makers and people from all income groups and nations, to harness converging technologies in order to create an inclusive, human-centred future. The real opportunity is to look beyond technology and find ways to give the greatest number of people the ability to positively impact their families, organisations and communities.’
The pivot to a greener and more sustainable future, and the magnitude of investment required, demands that public and private sectors work together.

The OECD estimates that $6.9trn a year will be required up to 2030 to meet the Paris Accord climate and development objectives. Furthermore, current energy, transport, building and water infrastructure make up more than 60% of global greenhouse gas emissions. An unprecedented transformation of existing infrastructure systems will be needed. The dollar size is beyond the capacity of governments alone. Private investment will be required in order to close the multi-trillion-dollar global infrastructure gap.

Investment Implications

The interplay between the forces of fiscal activism, pent-up demand and investment in innovation and the green economy is hard to predict; they will not all be additive to each other. It also remains to be seen whether the public and private sectors globally can meet the challenge of concomitant investment in decarbonisation, climate resilience and digital connectivity. But what we do know is that investment spend, painfully absent in the post-GFC decade, may be the key to unlocking a new type of growth ahead.

Unlike the past decade, which was marred by below-average economic growth and a paucity of government and private sector investment (with the notable exception of China), the decade following the pandemic is likely to be materially different. We see the potential for above-average growth in GDP for the next decade as investment and innovation are catalysed across a range of sectors simultaneously.

At current levels of interest rates, this is fundamentally an equity and not a bond-friendly environment.

Within Equities:

We advise that clients maintain their recommended exposure to risk assets in both public and private equity markets. Exposure to growth in private markets is not only an important diversifier to public equities, with enhanced return expectations, but can also serve as access to, and hedge against, innovation and creative disruption in public companies. As we have seen time and time again, new companies and business models can destroy established businesses and sectors, which may be left behind as things change. One has only to look at what Amazon has done to retail, and Airbnb to hospitality, or what advancements in the Cloud, Robotic Process Automation and Quantum Computing have and will continue to do to industry and enterprise infrastructure in the years ahead.

We are focused on identifying long-term structural winners. And while we embrace diversification across the spectrum of global equities, private equity and venture capital, we are most exposed to markets, sectors and economies that we consider best positioned to benefit from these trends. Given the magnitude of potential spend and the focus on innovation and global competiveness, we continue to favour the US and to increase exposure to China and Asia.

China’s progression as an economy holds tremendous potential for returns. Given the relatively nascent state of development in certain sectors, we see opportunities in both public and private markets. Take healthcare, for example. China is one of the fastest-growing major healthcare markets globally, with a five-year compound annual growth rate of 13%, compared to just 3% in the US and 2% in Japan (Source: Statista). But its form of advancement has the potential to leap-frog other developed countries, as one of our managers describes:

‘China is just at the start of healthcare and life science innovation, particularly when life science is combined with artificial intelligence and super-computing. There are so many advancements we can make.’ –– Hillhouse China
China may well be the largest economy in the world by the end of this decade; investors today have limited exposure. We want to be positioned in quality companies across a range of sectors that will benefit from China’s large market and strategic ambitions.

As we look at opportunities globally, we find the growth versus value debate too simplistic. There are many growth companies that will continue to produce above-average growth, profitability and superior returns, and there are value companies that will transform themselves to grow faster through business and technological change. Some growth stocks are clearly overvalued and will disappoint, while some value stocks will remain in the doldrums. Indeed, identification of companies that can compound wealth over time has never been more complex.

In the words of Howard Marks of Oaktree Capital:

‘Because markets are global in nature, and the Internet and software have vastly increased their ultimate profit potential, technology firms or technologically aided businesses can grow to be much more valuable than we previously could have imagined.
Innovation and technical adoption are happening at a much more rapid pace than ever before.
There have also never been as many highly capable people focused on starting and building companies. Since many of these companies are selling products primarily made with code, their costs and capital requirements are extremely low and their profitability – especially on incremental sales – is unusually high. Thus, the economics of winners have never been more attractive, with very high profit margins and minimal capital requirements.
Because the friction and marginal cost of scaling over the Internet can be so low, businesses can grow much more rapidly than ever before.
Hence, the moats protecting today’s winners have never been stronger, and indeed, the winners often get stronger and more effective as they get bigger, rather than bloated and inefficient.’
To summarise, growth and value businesses are both more vulnerable and more dominant in today’s world, with much greater opportunities for dramatic changes in fortune, positive and negative.

The investment implications in our view are clear. Companies that can continue to produce above-average growth will continue to produce strong returns. Using traditional value metrics does not apply to many growth stocks. Growth companies are often extremely profitable from an operating margin perspective, giving them more powder to grow and invest; they excel in businesses which scale and have winner-take-all dynamics. They also typically rely on ‘intangible assets’ such as brands, copyrights, patents and software, rather than more traditional ‘tangible assets’ such as property, machinery and equipment, making comparisons between different types of market valuations less valid. This is not to say that all growth stocks are winners but rather that value itself is a function of the ability to deliver persistent growth. Structural growth is key to compounding returns over time.

Hence, we focus on talented managers of flexible mind, who have a proven ability to identify quality growth, profitability and cash flow, irrespective of whether they are labelled value or growth stocks. The ability to identify winners and losers will be a source of excess return across both the growth and value spectrum.

Finally, and no less important, we invest with managers who understand the importance of an environmental, social and governance (ESG) lens. As a UN PRI Signatory, we applaud moral and social conscience in a world demanding greater inclusion and sustainable profits.

Fixed Income:

Our base case is that inflation increases only gradually over time. There continue to be tremendous impediments to rising prices, including the lingering effects of the pandemic, permanent economic scarring in some sectors, and world economies still operating far below productive capacity. Transitory price increases may happen; but entrenched higher inflation will take time to develop, if it does develop at all. Remember: innovation itself will bring corporate destruction, as well as price discovery across every sector of the global economy.

However, inflation expectations or fears (as opposed to actual inflation) may well increase over time. This means that real yields are likely to decline even as interest rates rise; this makes investing in nominal government bonds a dangerous risk-seeking proposition. Hence, for some clients, we have allocated part of our fixed income exposure to inflation-protected government bonds. We are also using dynamic bond strategies, which seek opportunities in rates and credit on both the long and short side of the market.

We also recommend, where appropriate for clients, absolute return strategies which often benefit from periods of market dislocation while providing a stable return at low levels of correlation to equity markets. Likewise, we favour selective real-estate opportunities, particularly those which provide robust yield, long-term inflation protection and the potential for capital appreciation, given attractive entry values.

A mix of these asset class opportunities can provide both diversification and a solid buffer of return for client portfolios.

Currencies and Alternative Assets:

We continue to review ways to insulate client portfolios from the reality of fiat currency debasement and increases in global indebtedness, including digital currencies. We hold gold for as our chosen real asset, store of value and hedge against possible material increases in inflation.

As seen in the chart from GaveKal , gold also outperforms bonds in Keynesian periods.

See article download for additional graph.

Given the stratospheric rise of Bitcoin in 2020, up over 300%, we have had many lively discussions around its merits as a form of digital gold.

Gold has been a store of value for centuries but is it also a medium of exchange. We do not yet see the plausible case for Bitcoin becoming widespread money. In addition, its lack of regulation and credible valuation metrics, and its excessive volatility, make it difficult at this time to consider for portfolio inclusion. However, we do understand the attractiveness of an asset that has true scarcity value and continue our research in this area.

Interestingly, we think central banks will join the march towards a cashless and digital currency world. China has already stolen the advance. Its trial launch of Digital Currency Electronic Payment (DCEP) bears increased scrutiny. Central banks around the world are undertaking deep research into their own versions of central bank-backed digital currencies. China certainly sees DCEP as a route to increasing the use and attractiveness of digital yuan in global trade.

The supremacy of the US dollar as reserve currency is not under threat but shifts to digital currencies and the rise of crypto currencies are trends to watch. Near-term, we think the US dollar should be less subject to material weakness in 2021 given the prospect of stronger US economic growth. But a decline in real yields and increasing twin deficits remain longer-term dollar negative.

Risks to the Outlook

While the outlook is constructive, there are risks:

Speculative Positioning: We worry that prices have already discounted a lot of the good news for recovery in 2021. The vaccine roll-out has a long way to go, and the race to vaccination is a race against the spread and emergence of virus mutations. As a global pandemic, vaccinations are only as good as the slowest country to vaccinate. It may well be that normalisation does not really occur until some time in the third or fourth quarter of 2021. Excess liquidity can also create ‘bubble-like’ positioning in assets, exacerbated by recent signs of speculation in retail trading. Markets always need time to correct and consolidate along the way.

Growth Disappoints: The experiment of Keynesian activism can also fail to bring either better growth or increased productivity; the world would then be left with a precarious hangover of indebtedness that would be crippling for generations to come. This is not our base case, but investors have seen this before in Japan.

Inflation: Governments and central banks can overstimulate; too much of a good thing could cause not a gradual but a sharp rise in inflation that is harder to contain. Market valuations could contract as interest rates are forced to rise more quickly than expected. ‘Taper tantrum’ fears as evidenced in 2013 can cause significant periods of market turbulence.

But as we think about inflation, we are keen to separate the transient from the entrenched. Global economies expanding at the same time can create both temporary and permanent cost and price pressures. For example, there is really no alternative to copper that can conduct electricity as efficiently and effectively. Spending to de-carbonise the world economy combined with fiscal policies aimed at infrastructure will be industrial metal and copper intensive.

At the moment, moreover, the world’s largest carmakers are facing a potentially crippling shortage of semiconductors, as chip-makers reserve supply for technology groups producing smartphones, tablets and gaming devices. Automobiles are now more reliant on technology than ever before and this is only projected to increase as everything from gaining entry to the vehicle to infotainment, diagnostics and advanced driver assistance relies on semiconductors. Semiconductors also exist at the intersection of emerging themes such as 5G, cybersecurity and clean energy.

However, it is not clear that price increases in certain commodities will lead to broad-based, entrenched inflation, nor that inflation in components such as semiconductors is permanent as market participants will be incentivised to bring new capacity on stream.

But what about inflation risk from other sources?

1. Increases in the minimum wage will force companies to move prices higher.
2. Onshoring of domestic production can cause product costs to rise.
3. Deficit spending can crowd out private sector borrowing, causing interest costs to increase.
4. Becoming ‘sustainable’ is a cost for many companies; that may at some point get passed on.

Inflation expectations can become embedded and self-reinforcing. A feature of markets for 2021 and beyond will be the constant worry about whether central banks are too far behind the inflation curve, even if actual inflation is slow to materialise.

However, our current view is that broad-based and entrenched inflation will remain muted until the output gap is closed, and unless and until aggregate long-term supply is insufficient to meet increases in demand.

Conclusion

The developed world is embarking on a significant expansion into deficit-fuelled growth and economic expansion led by investment and innovation. We are reminded of past periods of change:

‘The Renaissance changed the world in just about every way one could think of. It had a kind of snowball effect, with each new intellectual advance paving the way for further advancements. Innovation was the watch word. The Renaissance is credited with bridging the gap between the dark Middle Ages and modern-day civilisation’.
Periods of transformation are positive for long-term investors who have the ability and patience to benefit, particularly through exposure to secular tailwinds of innovation. There will no doubt be corrections and market volatility along the way, but a long-term perspective combined with portfolio diversification acts as the best overall return and safety buffer.

We agree with the investment adage: it is not about timing the market, but time in the market. A shown in the chart below, often a market high correctly anticipates a new type of economic renaissance ahead. Our focus remains on the secular winners of this growth.

See article download for additional graph.

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