What will the world look like in 2025?
COVID has shifted the global economy’s previous trajectory by forcing governments to engage in costly fiscal stimulus and handicapping industries such as travel. Simultaneously however, it has accelerated the growth of e-commerce and highlighted the productivity benefits of working from home.
These trends have had stark impacts on asset prices. I have previously discussed that speculation is a source for concern, and here I delve further into the inflationary effects that stimulus is having on asset prices across stocks, bonds and commodities.
In this interview, I sat down with Investment Specialist Douglas Isles to explore key trends in the global macroeconomic landscape and consider the broader influence of geopolitical tensions on investment decisions.
Recorded Thursday 27 August
Douglas: Andrew, we hear a lot in discussions about macroeconomics, and one of the things that's really building up as well is geopolitical tension. We're being asked, what do we think is going on in the US election and how we feel about the increasing tensions between the US and China. What are your views on both of these topics?
Andrew: I think we are in a world where the US, and not just the US, the Western world are going to be in this political battle with China, and we have to live with the fact that's going to be ongoing. The interesting question is to what extent the political fight is separate from the economic one. What we've seen over the last two years as a result of the trade war and the ongoing disputes is just how highly interconnected our economies are.
I've been saying there is no Australian economy, US economy, Chinese economy. There's just the global economy. And really, it's very hard to pull that apart as the US I think have found.
It doesn't mean that they won't continue to fight these skirmishes that will involve Huawei and the bans that have been placed there. Most recently are the issues around TikTok and its ownership from ByteDance. Those sort of things will continue to be there. The question is to what extent governments really want to get at the true underlying workings of the economy. And I think what we've seen there is that both sides back off from that. But it's going to be part of the landscape undoubtedly. And we just have to, as investors, work our way through those issues with all the individual companies that we're buying.
Douglas: And how relevant is the US election in that regard?
Andrew: What I would expect is that if we do see a change in the White House, and I'm making no bets on whether that is the case or not, is that there's no doubt that a Democrat in power is not going to see any backing away in trying to resolve these issues and tensions with China. They are going to remain. I suspect they will get a far more conventional approach. And with a more conventional approach, I think that's something that markets will be able to live with a little more easily, as opposed to a sudden announcement from nowhere that the current administration serves up to us on a regular basis.
Douglas: You talk about the global economy. One area where there is an important relativity is currencies. Some people are talking about perhaps the demise of the US dollar. How do you contextualise that? And how do you think about that from a portfolio context?
Andrew: The most important thing that's going on at the moment in that sense is the creation of money or the printing of money by the banking systems around the world. And it's a result of the direct monetary-QE type policies. It's also a function of the fact that central banks are funding the government's fiscal stimulus. We're creating all of this new money. We know, it's an identity. New money is inflationary. We can't see inflation in goods and services, but we see it in asset prices everywhere. In the bond markets. We see it in the stock market. It's definitely there, but what will happen with the currency specifically is that whoever prints the most probably, many moving parts here, but you would have a bias against the currency that is printing the most. And what it looks like right now is that is most certainly the US. So, we have reduced our exposures to the US dollar very significantly. Taken on board Australian dollars, Euro. And then of course we have underlying positions in the Chinese yuan, the Japanese yen.
Douglas: People talk about on the other hand, the deflationary pulse coming from the likes of a COVID lockdown. And then we've got the flow and effect interest rates. What is your view now on the inflation and rates environment?
Andrew: As the economies continue to recover from this downturn, and they will continue to recover. Maybe with some ups and downs as we get the second wave lockdowns and so on. But it will recover. As that does, and we've had all this money put into the system. Does that start to come through to goods and services? And it's easy to see a scenario where that does, and we're already seeing some commodity price inflation, which is surprising given where economic activity is and so on. The other possibility though is that, all of this government debt that's been created. Governments they pay debt back a couple of ways: They tax us now, or they tax us in the future. And you can get the situation that you face somewhere like Japan, where that really creates a long term deflationary scenario.
And what really is happening there is the response of the rest of the economies to pull back on their consumption and investment. Because I know the government's going to be coming for them eventually. You can get all these different scenarios. And on interest rates, even with inflation going up, the Fed can control rates, probably. Hold them down, but then you'll really get a weak US dollar. So, they'll have to make a choice. One or the other. And so I think there's a variety of possibilities out there that one has to be thinking about. But at the moment, given the absolute mantra of keeping rates low, we think you'll probably get a bit more inflation. Lower real rates, even negative real interest rates as we clearly already have, and a weaker US dollar in the case of the US.
Douglas: So with the whole pandemic, we've commented a lot on the medical side of things. Other than higher taxes in the future, which you've alluded to, what do you think COVID will end up changing forever? If we look at 2025, how does it look compared to how it might've looked without this pandemic?
Andrew: Undoubtedly, companies have proven that you can work from home. We've had to. And I think there's some great upside from working for home in terms of productivity. There's probably lost things in terms of connectivity and cohesion in teams. So, we're going to get more work from home.
If someone works from home one day a week, rather than going to the office, Think of what that does to the demand for office space. For retail space in a CBD. You just take it down 20%, that's a huge fall. So we've got some interesting things happening there. But what could be more disturbing is that if you can work from home, then maybe employees are going to say, "Well, why not work from Mumbai rather than Dee Why?"
And that's an interesting problem that we might face as companies go “Well, actually, all these roles can be put offshore.”
People think travel's not going to come back. We think travel is basically part of the human DNA. People love travelling. It's a growth industry. The human race did not spread itself across the entire globe because they were afraid of travel. People will travel again for leisure. Perhaps businesses will be a bit reluctant to spend money on it. But the day a salesman loses a deal because he tried to sign up over Zoom, I think you'll find there'll be a huge amount of business travel coming back as well. But budgets will probably keep that in tow.
I think travel will come back, especially once we have a vaccine. And to just throw in the other thing that everyone's obviously very excited, has been the big pickup in e-commerce. And what I'd say though, is if you take something like Netflix. Huge increase and spike in subscribers. And here's the interesting thing. I doubt at 2025 they'll have more subscribers than they would have had if it weren't for COVID.
It's brought it forward. It's probably brought business models to profits earlier. But actually, that's probably just on the same path that was in many respects.
Never miss an update
In a world awash with news and information, true insights remain hard to come by. Stay up to date with all of my latest content by hitting the follow button below.
MORE ON Macro
1 contributor mentioned
Andrew joined Platinum as a founding member in 1994 in the capacity of director and Deputy Chief Investment Officer. Previously he was a Vice President of Bankers Trust Australia covering Asian equities and managing the BT Select Market Trust -...