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What is happening to the world economy
– and what this means for investment
Hamish McRae
• Five great medium-term global shifts and …
• … their implications for the world of finance
• Three big questions about the future
Two huge stories: globalisation …
It has been said that arguing against
globalization is like arguing against the
laws of gravity.
Kofi Annan
… and recession-driven debt
I found this national debt, doubled,
wrapped in a big bow waiting for me as I
stepped into the Oval Office.
Barack Obama
The presentation's structure …
• First, a look at the forces behind this power shift
• Then, how the downturn speeded this shift
• The medium-term economic outlook
• The longer-term perspective – to 2030
• Some implications for global investment
Four great global trends
• Demography – an ageing developed world
• The environment – still pressure to be greener
• Technology – a more level playing field
• Government – under greater fiscal pressure
Ageing societies are different
• Europe and Japan are ageing fast
• Much of the emerging world remains young
• So there will be a great shift of economic power
• Attitudes in the developed world will shift …
• … towards wanting greater security
What this means for investment
• Some developed countries will grow faster than others
• China benefits now; India's "sweet spot" is later
• Savings will continue to come from Asia …
• … so Asian asset preferences are crucial
• Obvious consequences: Europe must fix its finances
• Less obvious: prizes go to those that adapt best
It’s good to be green
• The end of the oil era is a long way off, but …
• … uncertain energy supplies, coupled with …
• … huge demand from the US and China
• The desire for mobility will continue …
• … concerns about climate change will rise …
• … and continue to affect public policy
What this means for investment
• A rebalancing of wealth and power …
• … and a rebalancing of investment flows
• Does fracking change things?
• Obvious beneficiaries: the raw material producers …
• … who will become more important in investment choice
• Less obvious: companies that are best at adapting
The revolution in technology
• It is (nearly) a global level playing field
• Communications technologies are universal …
• … and deeply democratic
• But technology gives global reach …
• … as well as global competition
• New investors will reshape asset choice
What this means for investment
• It is not quite a level playing field but a flatter one …
• … for there are new peaks of excellence …
• … while old peaks can deliver excellence worldwide
• Obvious issue: what is the "old" world’s advantage?
• Less obvious: what can we learn from new investors?
Government in the 21st century
• There are some things only governments can do …
• … such as fight wars or rescue banks
• But huge pressures as debts and demands rise …
• … and revenues in the developed world are cut away
• The result: “financial repression” for a decade
What this means for investment
• The debt legacy for the G7 is massive …
• … and the closest precedents are long ago
• But this is not a grave as the inter-war period …
• … or in some ways the 1970s inflation
• So great pressure on the investment community …
• … but that brings opportunities too
This cycle: what have we learnt?
• There is such a thing as the economic cycle!
• Fiscal, monetary and regulatory failure
• Finance will be different for a generation …
• Investment needs people with a long view …
• … and a mix of human experience
So what happens next?
• We are well past the economic turning point …
• … and equities eventually will reflect that
• But there will be setbacks (Europe now) …
• … and the recovery will be a two-speed one
• Two questions: what next for the eurozone?
• … and when does the bond bear market begin?
The bad news about Europe …
• European fiscal reforms will constrain growth …
• … and will probably fail
• The Eurozone may hold together this cycle …
• … but at huge economic cost …
• … and it is hard to be confident about its future
A 30-year bear market in bonds?
• Parallels never perfect but two candidates:
• Fiscal repression in the 1930s …
• … and the great inflation of the 1970s
• Curbing inflation led to a 30-year bull market …
• … while war finance led to similar bear markets
• Timing: next two to three years
But better news globally …
• The US recovery has broadened substantially …
• … and it will be forced to fix national finances
• The slow-down in China is a positive, not a negative
• Momentum in the emerging world remains solid
• And northern Europe is very competitive
• The mid-cycle pause is normal and natural
… and for the investment world
• Growth areas will include energy and resources
• But also: luxury goods and services …
• … high technology, especially medical services …
• … and in finance, wealth management
• The great negative: the debt burden
• The great positive: reasonable global growth
The road to 2030
• The rebalancing power to the BRICs
• When does China past the US?
• What will the new middle class want?
• How will the new rich deploy their wealth …
• … and how will their values change the West?
Some key conclusions
• The shift of power to Asia is inevitable …
• … and global business will drive it
• The immediate economic outlook is troubling …
• … and it will be a two-speed global expansion
• The great anomaly is bond yields
• But that will demand more thoughtful investment
But please keep it fun!
I don't want to make money. I just want to
be wonderful.
Marilyn Monroe
What is happening to the world economy
– and what this means for investment
Hamish McRae
• Five great medium-term global shifts and …
• … their implications for the world of finance
• Three big questions about the future