“Creative disruption” – an expression inspired by Schumpeter’s “creative destruction” – was the unspoken leitmotif of Allianz Global Investors’ most recent Investment Forum. This time the Forum was devoted to three types of disruption: technological, political and investment- related disruptions........
Hans-Jörg Naumer Global Head of Global Capital Markets & Thematic Research
Technological disruption begins with the knowledge that productivity growth in both developed and emerging economies has been receding for some time now, in spite of technological change. Academics seem to agree that actual productivity growth may have been underestimated, but the downward trend nonetheless remains.
And then there is political disruption. Just think of the de-globalisation trend and the increasingly multipolar world order. Political disruption follows on from technological disruption. Technological change is transforming the labour market and is already evident in wage and job trends. Oxford University estimates that about 50% of all jobs are being affected by automation. The study is not infallible, in particular because it ignores new job opportunities, but it does show the impact creative disruption can have.
Mankind’s history has been marred by conflicts over the distribution of resources. The same should hold true in the future.
Disruption is also visible in investments. In a world in full flux, traditional backward-looking investment solutions like ETF’s might become obsolete. For example, equities now spend an average of just 12 years in the S&P 500; in the early 1960s it was 60 years!
Productivity growth will probably improve only slowly, as pioneering companies’ new technologies come into broader use. Inflationary pressure remains limited, with little danger of deflation, especially as the Trump administration continues to ramp-up its seemingly Keynesian fiscal policy in the late stages of the US growth cycle. Against this backdrop, central banks have every reason to take their foot off the gas.
This change in course is likely to become increasingly apparent at the Federal Reserve and probably also at the European Central Bank, albeit probably agonisingly slowly in the ECB’s case. Both geopolitical disruption and monetary disruption are likely to generate volatility in the capital markets, while government bonds continue to generate zero and, in some cases, even negative yields. So real returns can only be achieved by taking on measured risks. Active management is essential!
Tactical Allocation, Equities & Bonds.
Although we expect central bank liquidity to peak in 2018, monetary policy remains loose overall in the G4 nations. The Fed, however, may hike interest rates more than the markets expect in 2018.
Equity market valuations are mixed: while already high in the US, on average, they appear to be fair in Europe and attractive in the emerging markets.
Favouring equities, the “reflation trade” – i.e., betting on inflation, which benefits equities – may continue to be a valid strategy; however, investors’ lack of concern is a risk factor that could quickly lead to higher volatility.