From the end of the neoliberal era to policy intervention, these are the macro economic trends expected to mark the biggest future shifts in the economy BY YVES BONZON Yves Bonzon is the group chief investment officer at Julius Baer The coronavirus pandemic has been a tremendous accelerator of the secular trends we predicted back in December 2019. One thing is clear – 2020 marks the end of the neoliberal era, exemplified by extreme monetarism and austerity. In advanced economies, the coming decade will be about fiscal dominance and unprecedented policy intervention in the real economy and financial markets, blurring traditional market signals and thereby reinforcing the importance of a robust strategic asset allocation based on established macro economic trends. Bipolar Sino-US World The divide between the US and China continues to grow. While trade issues seem to have been put on the backburner, there are continued hostilities between the two countries on other fronts. The most notable subject is the coronavirus, as China is being blamed for the pandemic getting out of hand. With Joe Biden in the White House as of January 20, Democrats might tackle the conflict in a more diplomatic manner and give a greater importance to human rights issues, but the overall hawkish strategy should remain unchanged, if not strengthened. As China ploughs ahead with the aim of restoring the nation to its previous glory, this 21st century cold war over economic, technological, and military supremacy will usher in a new dual world order, with separate economic and financial cycles and technological ecosystems. In this context, the benefits of international diversification are revived after having been significantly undermined by globalisation, giving investors reason to own both US and Chinese assets in their portfolios. The emergence of a bipolar Sino-US world and the rise of China are of special interest to investors from the Gulf region – in a world with declining interest rates and scarce growth, it is more important than ever to have exposure to regions and sectors which can still deliver positive real returns. China, and Asia more generally, is a hub of growth and innovation, with ever-growing and deepening financial markets, and is set to become the largest global economy this decade. Unorthodox macroeconomic policies With the end of the neoliberal era comes the inevitable end of the policy toolbox dominated by monetary instruments. This policy template, which was in fact designed to solve problems that predated this period of extreme globalisation and financialisation, is dead, and the coronavirus crisis has buried it. There are four major aspects to the new policy landscape. First, with the credit channel out of commission, there will be much more emphasis on fiscal stimulus. As long as developed economies are subject to structural demand deficits and the private sector is unable to sustain growth on its own, the public sector must intervene and spend the savings glut accumulated by households and corporates. Second, in line with Modern Monetary Theory, central banks will cooperate much more closely with governments to finance (i.e. monetise) the accumulated deficits from these fiscal interventions. Higher debt-to-GDP ratios will be more widely accepted, and the fear of resulting runaway inflation should diminish as deflationary pressures are acknowledged as being much stronger. Third, stimulus will be implemented more directly. With the merger of the fiscal and monetary arms, central banks could deliver funds directly to households, a tool that could be further supported by the introduction of central bank e-currencies. Policy will thus become more efficient, as it could easily reach all sections of the population, including the most modest households with the highest propensity to consume. In that way, authorities could tackle the income inequality problem as well. We expect that governments will move to reduce inequalities through tools like symmetric taxation (eg. negative taxes for lower-income households, which is a much better option than universal income for all). Lastly, the unconventional monetary policies that emerged following the 2008 financial crisis will remain, as the main objective of developed-market central banks has by now become financial stability. In fact, it has already been at least a decade since monetary authorities have been practising ‘asset price targeting’, that is, supplying liquidity when necessary in order to avoid a negative wealth shock that could in turn derail the real economy. Eventually, these policies should reflate the economy, which is when they would really be put to the test. We are not at that stage yet. We believe, in any case, that the conditions for hyperinflation in developed countries are not even close to being met. Energy abundance World energy markets and related industries are undergoing profound structural changes. The dependence on fossil fuels, the past decades’ high prices, climate change, and environmental pollution are only some of the many challenges that have spurred investments and nourished innovation. We believe that we are in the midst of a transition, where new technologies satisfy our growing energy needs without further depleting fossil resources. The transition to renewables is accelerating thanks to affordability, scalability, and access to infinite resources. Electric cars, air conditioning, and heat pumps mark the next phase of electrification, underpinning the energy carriers’ future dominance. Traditional utilities are losing their customer base, as clean energy and new business models are breaking market barriers. From power trading to infrastructure finance, new players are altering the playing field. Meanwhile, the Covid crisis is accelerating the competitive dynamics in the oil business. Private oil companies have to venture to other areas, such as clean energy, to deliver growth and satisfy investors. Yet providing oil will still offer the opportunity to produce valuable cash flows for years to come. Ultimately, this is a shift from resources to technology and from producers to users, bearing broader geopolitical impact and raising the risks of related tremors. The major transition currently experienced by energy markets is of particular importance to GCC investors. Investors heavily-tilted towards oil companies will need to internalise these structural shifts and turn their attention to renewables and companies that embrace these changes. Stakeholder economy The benefits of extreme financialisation and globalisation have not been equally distributed across all social and economic groups. Worker compensation has lagged, while corporate profit margins in the developed world have soared, increasing both wealth and income inequality to levels not seen since the 1930s. Meanwhile, climate change and social equality issues have taken centrestage, especially in the eyes of younger generations. These pressure points are pushing the corporate sector to rethink their role in society. Increasingly, corporates are expected to assume ownership of their entire value chain and take active measures to promote sustainability and social responsibility, going beyond the satisfaction of regulatory rules and codes of ethics. This constitutes a major pivot point and a complete rejection of the shareholder-focused model. Life science disruptions Healthcare areas that are related to digital health, genomics, and extended longevity should see further upside potential over the longer term, given political tailwinds, momentous demographic shifts around the world, the emergence of chronic diseases associated with ageing, and ever-rising medical costs. The Covid-19 pandemic may very well be a watershed moment for the healthcare industry, as it has certainly laid bare the weakness of the entire healthcare value chain. At the same time, the pandemic has given greater impetus to strengthen our resilience for present and future health threats, through greater adoption of digital health technologies and other innovative solutions. Yves Bonzon is the group chief investment officer at Julius Baer

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