{"id":11177,"date":"2023-03-03T11:14:25","date_gmt":"2023-03-03T03:14:25","guid":{"rendered":"https:\/\/www.infinitysolutions.com\/?p=11177"},"modified":"2023-03-03T11:14:25","modified_gmt":"2023-03-03T03:14:25","slug":"the-great-moderation-and-investment-advice-for-the-next-decade","status":"publish","type":"post","link":"https:\/\/www.infinitysolutions.com\/blog\/the-great-moderation-and-investment-advice-for-the-next-decade\/","title":{"rendered":"The Great Moderation and investment advice for the next decade"},"content":{"rendered":"<p><em>Against a backdrop of volatility in global economics and with markets in turmoil, in February\u2019s quarterly market update webinar, Rob Clarry, <\/em><em>Investment Strategist at<\/em> <em>Evelyn Partners, presented an overview of the current investment landscape as well as some insights into what lies ahead and where investment opportunities can be found over the next decade<\/em><\/p>\n<p><strong>The current investment landscape<\/strong><\/p>\n<p>From a macroeconomic perspective, we have witnessed a turbulent few years. President Trump, Brexit, Covid, the energy crisis and the war in Ukraine have all contributed to an extremely unsettling global economic outlook. Western governments have responded to slowing global growth and rising inflation with negative interest rates, quantitative easing and significant government spending.<\/p>\n<p>There\u2019s no getting away from the fact that markets are volatile however it is all too easy to get drawn into day-to-day market noise. In this webinar, Rob Clarry took a step back to reflect on what all these events mean for the decade to come.<\/p>\n<p>But first, a summary of the period now being dubbed \u2018The Great Moderation\u2019.<\/p>\n<p><strong>What is \u2018The Great Moderation\u2019?<\/strong><\/p>\n<p><strong>\u00a0<\/strong>The Great Moderation is the term coined to describe a period characterised by stable economic growth, falling global interest rates, and low rates of inflation that began in the 1980s.<\/p>\n<p>Of course, there were blips during this time, but it is generally agreed that this was a positive period of relative macroeconomic stability.<\/p>\n<p>Opinions differ as to when The Great Moderation ended. Some <a href=\"https:\/\/www.avivainvestors.com\/en-gb\/views\/aiq-investment-thinking\/2022\/04\/great-moderation\/\">experts<\/a>, including Rob, claim that the period was brought to an end by the pandemic, <a href=\"https:\/\/www.economicshelp.org\/blog\/6901\/economics\/the-great-moderation\/\">others<\/a> that it ended with the financial crisis of 2007.<\/p>\n<p>The three principal drivers behind the macroeconomic stability of this period were:<\/p>\n<ol>\n<li><strong>Favourable demographics<\/strong> \u2013 over a prolonged period there was a steady increase in the working-age population relative to the overall population, particularly in China and Eastern Europe. The rise of women in employment also contributed to this expansion of the global workforce.<\/li>\n<li><strong>Urbanisation <\/strong>\u2013 the migration of rural workers to the cities, particularly in China, kept the price of Chinese goods low and powered domestic and global economic growth. As an example of the magnitude of urbanisation witnessed in China, consider the population of Shenzhen, which grew from just 5,000 in 1955 to 12.5 million in 2021!<\/li>\n<li><strong>Globalisation<\/strong> &#8211; globalisation enabled advanced economies to tap into this pool of cheap labour. Companies were able to exploit low labour costs to generate big profits. A downward trend in inflation and interest rates in advanced economies supported strong global growth over four decades.<\/li>\n<\/ol>\n<p><strong>The five economic megatrends of the next decade<\/strong><\/p>\n<p>It is generally recognised that we are now at an inflection point. Rob outlined five megatrends that will shape the decade to come. The first three of these represent a reversal of the trends which fuelled The Great Moderation. The fact that these tailwinds are now becoming headwinds makes for a much gloomier outlook ahead.<\/p>\n<p>The five megatrends shaping global economics in the years to come are:<\/p>\n<ol>\n<li><strong>Demographic reversal<\/strong> \u2013 the old-age dependency ratio is set to increase sharply with fewer workers relative to retirees. In Japan, for example, 80% of the population will be 65 or over by 2050. Fewer workers will reduce economic output and an older global population will lower demand, placing downward pressure on inflation. China\u2019s shrinking working-age population could potentially drive up wages and imported costs.<\/li>\n<li><strong>Slowing urbanisation <\/strong>\u2013 although urbanisation will continue in China, it is slowing down and the pace of the great migration will not be repeated. This too will be a drag on growth with inflationary potential. While economists believe that India and Africa could pick up some of the slack, future urbanisation will not match the levels seen in China over the last few decades.<\/li>\n<li><strong>Changing world order<\/strong> \u2013 we are witnessing the emergence of a multi-polar world order. The US is working to reduce reliance on Asia and building domestic production, China is aiming to become self-reliant and the <a href=\"https:\/\/www.reuters.com\/world\/china\/moscow-beijing-partnership-has-no-limits-2022-02-04\/\">\u2018no limits\u2019 friendship between Russia and China<\/a> is a cause of serious concern in the west. Re-shoring production to higher-cost countries in order to diversify supply chains will increase costs and prices.<\/li>\n<li><strong>Accelerated energy transition <\/strong>\u2013 the Ukraine war has brought about a sea change in clean energy investment in the US, Europe and the UK and highlighted the importance of getting to net zero. Net zero carbon investment will increase upward pressure on inflation. In addition, China holds a lot of the cards for the clean energy transition with a dominant market share across the entire clean technology value chain. An additional challenge to energy security is the mining of materials concentrated in unstable economies such as the DRC.<\/li>\n<li><strong>Technological advancement<\/strong> \u2013 new technologies will underpin the next macroeconomic supercycle and will be a key enabler in shaping the next decade. They will play a crucial role in energy transition, elderly healthcare and efforts to bring back manufacturing from Asia to the west, particularly in AI and robotics. Empirical evidence suggests that technology could lower inflation and boost economic growth, helping to offset the negative impacts of other megatrends.<\/li>\n<\/ol>\n<p><strong>Investment Strategy \u2013 how to invest over next decade<\/strong><\/p>\n<p>While stressing the difficulties in predicting what happens next, Rob warned that the next decade will inevitably be a volatile period, likely to feature higher inflation and interest rates and neutral growth.<\/p>\n<p>Investment opportunities from increased government spending in clean energy, defence and re-shoring could offset some of the challenges posed to growth. These are the areas investors should consider for direct exposure to these opportunities:<\/p>\n<table>\n<tbody>\n<tr>\n<td width=\"209\"><strong>Megatrend<\/strong><\/td>\n<td width=\"397\"><\/td>\n<\/tr>\n<tr>\n<td width=\"209\">Demographic reversal<\/td>\n<td width=\"397\">Healthcare, life sciences, biotech firms will benefit from (i) greater longevity and (ii) higher old-age dependency ratio<\/td>\n<\/tr>\n<tr>\n<td width=\"209\">Slowing urbanisation<\/td>\n<td width=\"397\">Companies\/countries in the Asia-Pac region (e.g. Vietnam) will benefit from the diversification of supply chains away from China.<\/td>\n<\/tr>\n<tr>\n<td width=\"209\">Changing world order<\/td>\n<td width=\"397\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0 US\/EU semi-conductor firms and supply chain will benefit from ambition to build domestic capabilities<\/p>\n<p>\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0 US industrials (defence and infrastructure) will benefit from Inflation Reduction bill<\/td>\n<\/tr>\n<tr>\n<td width=\"209\">Accelerated energy transition<\/td>\n<td width=\"397\">\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0 Clean energy infrastructure firms will benefit from policy and Europe\u2019s pivot away from Russia<\/p>\n<p>\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0 Nuclear demand to increase to facilitate energy security (Japan restarting, UK scaling up)<\/p>\n<p>\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0 Greater demand for energy transition metals and materials (e.g. copper)<\/td>\n<\/tr>\n<tr>\n<td width=\"209\">Technological advancements<\/td>\n<td width=\"397\">Technology is a key enabler in the next decade. Robotics and automation will support on-shoring: clean technologies will underpin the energy transition, artificial intelligence could help to alleviate future labour shortages.<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>&nbsp;<\/p>\n<p><strong>Is it time to make changes to your portfolio?<\/strong><\/p>\n<p>An inflection point such as the one we are experiencing now is a good time to review your portfolio. While we never recommend knee-jerk reactions to market noise, these are dramatic changes that look set to define a lengthy period and may warrant a rebalancing of your assets.<\/p>\n<p>Talk to your financial adviser to set up a review meeting.<\/p>\n<p>If you are not already an Infinity client and would like to benefit from our extensive knowledge of the markets and access world-class investment management with <a href=\"https:\/\/www.evelyn.com\/\">Evelyn Partners<\/a> exclusively in Asia, <a href=\"https:\/\/www.infinitysolutions.com\/contact\/\">contact us<\/a> to be connected to one of our financial advisers in the Asia Pacific region.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Against a backdrop of volatility in global economics and with markets in turmoil, in February\u2019s quarterly market update webinar, Rob Clarry, Investment Strategist at Evelyn Partners, presented an overview of the current investment landscape as well as some insights into what lies ahead and where investment opportunities can be found over the next decade The&hellip;<\/p>\n","protected":false},"author":2,"featured_media":11179,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false},"categories":[153,45,66],"tags":[],"class_list":["post-11177","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-blog","category-investment-management","category-viewpoint","category-153","category-45","category-66","description-off"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v25.0 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>The Great Moderation and investment advice for the next decade | Infinity Financial Solutions<\/title>\n<meta name=\"description\" content=\"Infinity Financial Solutions We integrate financial solutions products in order to provide optimum benefit to our customers.\" \/>\n<meta name=\"robots\" content=\"index, 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