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Banking
Shifting Gears
than entrepreneurs and their workers. In addi- tion, the rise in security prices has diminished the returns available on deposits or on fixed income instruments. This means that savers – for example, those building assets to fund a pension plan – have been penalised. As yields decline, more capital must be deployed to guarantee the same level of investment income.
European Union
In addition, greater commercial and economic integration across borders has encouraged greater international mobility of labour. In the European Union for example, to the population flows driven by freedom of movement for workers has been added the influx of refugees fleeing trouble spots in the Middle East and in Africa. Given the above- mentioned factors, it is not surprising that many voters have felt threatened.
This framework can help us understand the two unexpected electoral results we mentioned above. In both cases, “lost jobs”, “falling living standards” and “uncontrolled immigration” have proved powerful arguments for change.
One of the changes underway is a shift from over-reliance on monetary stimulus to a renewed focus on fiscal policy. Concerns that unconventional monetary policy is having little impact on inflation or growth have fuelled fears that central banks might reduce or even stop their asset purchases. While the build-up in debt in recent years constrains most governments’ ability to make radical changes, the change in emphasis is welcome.
By Alan Mudie, Head of Investment Strategy, Societe Generale Private Banking
2016 witnessed a number of major upsets on the political front, ranging from the United Kingdom’s decision to quit the European Union to the surprise elevation of Donald Trump to his first elected office. It is perhaps no coincidence that what appears to be a rejection of the established political order has occurred almost a decade after the Great Recession.
The last three decades have witnessed a profound transformation in global commerce as multi-lateral trade agreements under the aegis of the World Trade Organisation (WTO) have enabled companies to build international supply chains. This trend only accelerated after China’s accession to the WTO in 2001.
As companies began to offshore manufacturing capacity, the number of jobs in Western factories continued to decline, feeding fears that jobs had been “lost” to China or elsewhere. More efficient supply chains also helped reduce prices of many goods, contributing to downward pressure on producer and consumer prices. In turn, falling inflation meant modest wage increases for workers which fuelled fears of a decline in living standards, most keenly in those communities which had suffered factory closures.
In this context, political and popular scepticism about the benefits of free trade has risen, leading to a gradual rejection of the previous decades’ easing of trade restrictions. Since 2008, barriers to commerce have been raised again and global trade volumes have slumped well below pre-crisis levels. And in turn, this slowing of trade flows has contributed to weaker economic growth in the aftermath of the global financial crisis of 2007-2009.
Global crisis
The crisis was triggered by a build-up in debt, in particular sub-prime mortgage lending in the United States. It became global when it emerged that the international financial system was highly exposed to this risk; and the scale of the ensuing downturn in activity was such that it was judged that highly unconventional monetary policies were necessary to restore growth. First, interest rates were cut to negligible or even negative levels. Then, central banks expanded their balance sheets to purchase financial assets (e.g. government bonds), with the aim of lowering yields across different maturities and encouraging banks and investors to seek higher returns elsewhere.
As a result, the unconventional monetary policies conducted over the last decade have benefited owners of financial assets. The inflation that was targeted by central bankers has shown up in bond prices
‘The crisis was triggered by a build-up in debt, in particular sub-prime mortgage lending in the United States
rather than in those of goods and services, at In summary, the shifting gears in the least until very recently. The growth stimulus policy mix will bring new opportunities
that was sought has reflected in equity prices – the S&P index of large-cap US stocks has increased by 230% (data as of 23 November 2016) since its March 2009 low – rather than an acceleration in productivity or gross domestic product (GDP) growth.
This in turn has fed a divisive rhetoric
but also new risks for investors. More expansionary fiscal policy would boost growth but valuations could be pressured by rising interest rates and dollar strength. In this context, broad diversification across assets and long-term themes remains advisable.
that “Wall Street” has been given preference to “Main Street” – that is, that financial intermedi- aries have benefited more
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