Five major global macroeconomic themes could drive financial markets through to 2020 as global expansion slowly continues.
This is according to the latest Global Insights issued by Prudential Fixed Income, the asset management arm of US insurer Prudential Financial.
Arvind Rajan, managing director and head of global and macro for Prudential Fixed Income said the investment implications of five key trends were that, "Global growth should continue but at a slow place. Over the next five years, credit spreads should remain broadly attractive, especially for financials, structured products and selected high yield. Duration also looks attractive in certain developed and emerging currencies."
Global Insights' five themes are:
- A multi-speed world. G10 and emerging markets splinter into medium- and low-growth camps. Asynchronous growth should continue for several years, which is a healthy phenomenon that allows the global economy to avoid co-ordinated booms and busts as it slowly expands.
- Cyclical and quantitative "reflation" battles secular deflation, but ultimately loses the war. Secular disinflationary forces including an aging population, high indebtedness, technology and economic inequality should hold reflation in check, creating a long-lasting, but volatile and uneasy low interest-rate equilibrium.
- Liquidity and credit - scarcity amid abundance. While investors fear the kind of liquidity withdrawal experienced in 2008, the higher probability is that markets will see episodic, moderate losses of liquidity, especially in single sectors of such asset classes as high yield. That environment should give active investors an opportunity to take advantage of price dislocations.
- Commodities - divergent supply and demand dynamics ahead. After becoming accustomed to rapidly rising - then plummeting - commodity prices, investors may find themselves surprised by range-bound prices in the future. Also, commodities are likely to follow global demand rather than lead markets over the next five years.
- Lurching toward a multi-polar world. As US influence wanes, the world is expected to continue to reshape old alliances and create new ones as its problems grow too complicated to be managed by a single superpower. Against that backdrop, serious geopolitical threats from cyber attacks, terror attacks and regional tensions in the Middle East, North Korea and elsewhere could significantly roil markets and test global political leadership in the coming years.
Prudential Fixed Income has $560bn in assets under management.