Foresight - Economics
Infographic: Inescapable truths for the decade ahead
This interactive infographic illustrates our inescapable truths; the economic and disruptive forces we think will shape the investment landscape over the years to come.
11 February 2019
Keith Wade
Chief Economist & Strategist
Charles Prideaux
Global Head of Product and Solutions
Schroders has identified a number of forces that could shape the investment landscape in the decade ahead. These represent our ‘inescapable truths’, which can help guide investors through a time of unprecedented disruption.
In a more challenging future environment, factors such as asset allocation, access to multiple sources of return, active stock selection and risk management will be critical in meeting the goals of investors in the coming years.
Economic forces
A confluence of factors set the scene for a slowing global economy
Decline in labour force growth, largely a result of declining fertility rates
Productivity growth low but improving, we believe emerging markets can offer greater potential for gains
Greater life expectancy to pressure government finances and temper recovery in productivity
China’s global influence will increase, but it faces a decisive transition period
Inflation pressure will be limited by slower spending, an ageing population and levels of debt
Interest rates expected to remain low by standards of pre-crisis levels
Disruptive forces
Disruption will come from a number of angles
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Market disruption
End of Quantitative Easing (QE): Other central banks likely to follow US lead to reduce assets on balance sheets. This could increase supply of government and corporate bonds to the private sector.
Changing patterns of finance: Banks will play a reduced role in financing economic activity. Corporate bond market expected to expand, along with private equity and alternatives (e.g. peer-to-peer lending, crowdfunding).
Technological disruption
Changing business models: Technology has a tendency of disrupting existing businesses which creates winners and losers. Picking those on the right side of technological progress will be key for portfolio performance.
Greater labour market displacement: Rise of robotics and AI will impact a wider range of professions. This may worsen problems of inequality which can bring greater political disruption.
Environmental disruption
Rapid action needed: There are growing tensions between the real economy and natural environment – particularly climate change. While inaction implies significant long-term risks, steps to avoid the worst of climate change will also prove disruptive. Find out which sustainability issues matter to investors.
Political disruption
Financial squeeze: The economic outlook will undermine government finances, while aging populations will increase pension spending and demand for healthcare.
Pressure on individuals will grow: Government challenges will mean people will need to take greater individual responsibility for funding their retirement and healthcare.
Rising populism: Populism has been fuelled by stagnating living standards for most of the population. Policies to temper the impact of globalisation through restrictions on trade, immigration and capital flows are likely to emerge.
Investment Implications
1.As interest rates normalise and QE unwinds, we think there will be greater focus on profitability and earnings growth as drivers of growth. Market volatility will also be high.
2.There will be greater divergences across asset classes and within markets, and absolute levels of returns for stocks and bonds will likely be lower than in recent past. Nevertheless, our research shows that the typical investor is expecting annual average returns of 10.2% over the next five years.
3.The result of this is that there will be greater need for active fund managers who can generate alpha i.e. beat the market in the decade to come.
In summary, after almost a decade of strong returns many investors have become complacent about the outlook. This assessment suggests that in a more challenging future environment factors such as asset allocation, access to multiple sources of return, active stock selection and risk management will be critical in meeting the goals of investors over the next decade.
As we enter the next phase of the post-global financial crisis era, these inescapable truths can help guide investors through a time of unprecedented disruption.
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