During the Economic Fireside Chat at TradeTech in Paris this morning, a panel of leading economists, researchers and practitioners discussed the impact of the coronavirus pandemic on global economic activity and what it could mean for the future. both from a balance sheet and cash flow perspective.
Interest rate volatility
Of course, one of the main issues in the coming year will be the significant rise in inflation and how central banks can manage that.
“There’s been a huge jump in commodity prices – oil prices, gasoline prices, wheat prices given the situation in Ukraine,” said Kevin Daly, senior economist at Goldman Sachs. “Growth is holding up better than expected, but everyone is trying to cope with this massive inflationary dynamic which was already there before the war but which has considerably exacerbated.
“Central banks have a ready toolkit in the form of interest rates to deal with inflation. But will they be able to walk the tightrope between slowing growth enough to reduce inflation, but not enough to push the economy into recession? It’s a very thin path with lots of places to fall.
American Opportunity
Jane Buchan, CEO of Martlet Asset Management and a seasoned hedge fund specialist, pointed to a critical opportunity for European asset managers as US investors begin to look beyond their domestic lens for the first time in a long time.
“In the United States, we had a really tough start to the year,” Buchan said. “It used to be a market where you were rewarded for being in the US – a lot of investors said, why put our money overseas when the domestic market is doing so well? So what is happening now is a small-scale panic in the institutional asset management market. Should we be more diverse, should we look overseas? They are also exploring different asset classes that they may not have looked at before. Exchange rates and currencies, commodities, have all been pushed aside for the past few years, and people are now reassessing that. We are seeing a move by the big US investment managers to change what they want to do.
One such trend is a shift to equities given the current freefall in the fixed income market. “In the United States, we had a bull run on bonds. As people see those values falling, we could see a reallocation back to equities,” Buchan predicted.
“US institutional investors will look more outside the US than they have in the past five years, and that’s a strong message for European asset managers.”
Focus on climate change
Finally, Dirk Schumacher, Managing Director and Head of European Macro Research at Natixis, underlined the crucial importance of climate change as an impact that investment managers must take into account in the years to come.
“Climate change is real and we have to spend a lot of money to deal with it,” he told the conference. “There will be mistakes made along the way. There will be structural breaks, there will be sectors that will not adapt, energy prices will remain high. All of this is difficult to model, but the green transition is here to stay, and the sums spent will be colossal.
Adapt to the opportunity
Looking ahead, it’s likely that the world will end up looking like a rather different place in the next few years, and strategies will have to adapt to adapt to that.
“Where are we once all these shocks have been absorbed? Schumacher asked. “The neutral rate will probably end up being higher than it was before.”
Daly agreed. “The question is: when will we see the peak of US inflation? This will be the next big thing for the market to deal with. You will need to decide which trades you want to set up in this environment.
“I’m not sure we would want long-only stocks. You might want to take off your US fixed income shorts. We are seeing initial evidence that the spike could be around the corner within the next two months. The challenge will be how the market responds to it.
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