Every generation has its challenges. Similarly each investment life-cycle experiences its own unique set of head winds. Whilst ever present, several key trends are increasingly coming to the fore as we navigate 2021 and beyond. Important issues including climate change, aging populations and technology adoption have huge implications for investor portfolios. The pandemic has accelerated the pace of technology adoption in particular. This along with demographic pressures is deflationary. The executive summary on the outlook for both equities and fixed income is incredibly challenging. Increasingly investors are being forced up the risk curve into higher yielding debt issuances, speculative assets and crypto- currencies. We must recognise that there has been a re-definition of the risk-free rate with so-called safe haven assets no longer offering reliable income streams. This has knock on consequences also in terms of how we analyze and value assets in general. Remember all assets [including currencies] compete with each other. A healthy knowledge of financial history is useful in contextualising the current landscape. More on that later.

Step 1: Where are we?

The most recent Covid-19 recession and recovery were extraordinary both in terms of the causal factors and the policy responses. Unlike previous recessions, it was driven primarily by a supply side shock and not the customary depletion of economic demand. Most economic commentators are forecasting sharp recoveries as the global vaccination roll-out continues. Like technology adoption, the pandemic has also unfortunately accelerated the quantity of debt fuelled government interventionism. Most reasonable people would agree however that the fiscal policy response was the humane thing to do. Businesses through no fault of their own were mandated to close their doors. It is roundly accepted that governments simply had to fill the breach with massive fiscal spending programmes to keep consumers and businesses afloat. There was no room for monetary policy intervention. Nevertheless the mounting debt situation has sharpened the focus on a number of core investment themes which are inter-connected. The debt burden means that the FED cannot raise rates without causing considerable problems in the real economy. Increased inflationary pressures may force the FED’s policy response.

There is a deeper philosophical argument worth exploring here also. As commentators and market participants we may often be too quick to offer criticism of the current government policy action. We should remember that as a collective, citizens have demanded fiscal intervention through the medium of supports to struggling businesses and households.

The impact of government intervention has been felt most notably in the bond market. The cumulative and continuous suppression of yields since 2010 means the outlook for sovereign fixed income markets in particular is bleak. The starting yields are extremely low which translates into paltry average expected returns across government bonds over the next 10 to 15 years. Therefore the case for fixed income is extremely weak. Remember asset classes are competing with each other. Who is going to be the beneficiary from the rotation away from bonds? It may depend upon the character traits attached to fixed income. For instance some may seek an alternative safe haven leading flows into gold or even Bitcoin as a stable treasury asset. Alternatively high-yield dividend paying stocks or property may replace the income component.


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