Deflation, globalisation and politics of the centre are things of the past, according to Newton Investment Management’s Paul Brain, anticipating the announcement of a new Newton thematic framework in the coming weeks.
“The three multi-year trends that influenced our macro-focused investments so far no longer hold sway over our thematic perspective,” Brain, investment leader of the fixed income team at Newton, said.
“The new dominant underlying drivers of macro themes we see today and going forward can be described as deglobalisation, divergence and disagreement.”
But how did this shift come about?
Covid has been a catalyst for the shift and made it “abundantly clear that we have entered a different regime”.
But these trends had started to unravel even before the pandemic struck, according to Brian, who believes the many years of loose monetary policy ushered in by the global financial crisis created an environment of rising wealth inequality, driving a move to more radical and populist politics exemplified by Brexit and the US presidential election of Donald Trump in 2016.
“Prices on financial assets were being bid up by the abundance of cheap money in markets. Companies found it more profitable to borrow cheap money, and instead of using it to reinvest in their businesses or boost production, many returned it to shareholders instead, which had the effect of ramping up asset-price inflation even further. Meanwhile, production suffered, wages were depressed, and inflation was absent,” he said.
Newton thinks this has led to deglobalisation, divergence and disagreement steering the economy.
‘Deglobalisation’, it explained, indicates the tendency to shorten supply lines and achieve greater self-sufficiency in goods and services. This is a natural consequence of the global pandemic and the war in Ukraine. At the same time, China is evolving from being the world’s biggest producer of goods to an economy which balances exports with addressing internal consumer demand.
“Aspects of this trend are being researched in our ‘big government’ macro theme (previously called ‘state intervention’) and our ‘China influence’ theme,” said Brian.
The second point, ‘divergence’, refers to how we react to global differences in monetary and fiscal policies.
Newton’s ‘big government’ theme picks up on a shift towards more fiscal stimuli, both deriving from pandemic-generated furlough schemes, business grants and loans and from varying subsidies to tackle the current cost-of-living crisis. Newton’s ‘financialisation’ theme additionally captures the reversing effects of monetary policy going from loose to tight.
Finally, ‘disagreement’.
“There are always disagreements in terms of government policy, but the rise of populism in Western politics has shifted government policy away from the centrist, ‘middle of the road’ approach towards more extremes – both left and right – and more intervention,” said Brian.
The change in direction on interest rates, from converging towards zero to now rising at different speeds, raises further conflict in terms of currency values, while rising Chinese wealth and technical expertise and the Ukraine conflict are other examples of disagreement between countries.