Constraining global growth: over-indebtedness, ample liquidity, beggar-thy-neighbor currency actions, regulation glut, low government bond yields, changing demographics & lowflationThe total amount of negative yielding sovereign bonds has grown significantly due to negative interest rates and QE, but these measures would have little impact on inflation expectations
TORONTO and BOSTON, Oct. 14, 2016 /CNW/ — In Manulife Asset Management’s latest “Salient 7” report, Chief Economist Megan Greene and co-Head of Asset Allocation Robert Boyda outline the seven themes that they believe will underpin macroeconomic and market dynamics in the foreseeable future.
The latest report takes into account developments in the last 20 months and examines what it could mean for policymakers as well as investors.
Additionally, Greene notes, “Central bank action has pushed government borrowing costs down significantly. In January 2015, the total value of negative yielding sovereign debt was US$4 trillion. Now, it’s closer to $12 trillion.”1
“Central banks have become a dominant player in the fixed income markets. There’s the risk that some central banks could run out of bonds to buy – notably, the ECB, which could run out of German bunds to buy next year.”
While it makes sense for policymakers to turn to fiscal stimulus to spur growth, Greene notes that the political calendar in the next 12 months could restrict their ability to act, particularly in light of the rise of an anti-elite, anti-globalization discourse in the Western world.
According to Greene, “This has led to a rise in uncertainty, which is being fed back into economic and political indicators, creating a skittish loop. This isn’t going to help either investments or consumption.”
Robert Boyda, co-Head of Asset Allocation agrees and notes additionally, “We believe bond investors will not get much out of conventional fixed income for some time. We see potential value in a much more active, opportunistic, flexible and risk-aware approach; the search for yield may require a global focus with attention to coupons, safety, currency and policy-driven risk. Emerging Market debt and high yield bonds may offer fair value. It may be difficult to find value outside of special situations driven by periodic global dislocations; we believe this means embracing the volatility and uncertainty which provide opportunities.
“In a low-growth, low-inflation world, equity investors have flocked to defensive, dividend-paying sectors and stocks that behave like bonds; we believe valuations here reflect too much enthusiasm. The overindebtedness that limits government spending means that fiscal policy driven growth will be scarce. In a low-growth world, valuations are full for US equities. European equities could offer opportunities for those willing to look past the myriad crises; we think it is still too early. Emerging Markets equities are relatively inexpensive, and the valuation buffer could provide a measure of safety in a volatile asset class.
“As long as central banks stay accommodative, risks of a policy-induced recession are low. But that doesn’t eliminate the likelihood of significant price corrections; embrace the volatility.”
The Salient 7 report lists seven themes that the authors believe will underpin macroeconomic and market dynamics in the foreseeable future, and attempts to map out what it could mean for investors.
Over-indebtedness: Total indebtedness by governments and households continues to increase
Ample Liquidity: The global economy is awash with liquidity and credit, thanks to successive rounds of easing measures by major central banks
Beggar-thy-neighbor currency actions: Countries are hoping to boost demand and growth by increasing their competitiveness via a weaker currency
Regulation glut: As capital requirements for other assets rise, investing in sovereign bonds has become more attractive from a capital cost perspective
Demographics and the drive toward debt: An aging population encourages many investors to shift into fixed income from equities
Low government bond yields: Secular stagnation and easy monetary policy is likely to mean the continued compression of government bond yields
Lowflation: Lack of global demand is expected to translate into little upward pressure on inflation, with many central banks missing their inflation targets.
About Manulife Asset Management
Manulife Asset Management is the global asset management arm of Manulife, providing comprehensive asset management solutions for investors. This investment expertise extends across a broad range of public and private asset classes, as well as asset allocation solutions. As at June 30, 2016, assets under management for Manulife Asset Management were approximately C$435 billion (US$334 billion, GBP£252 billion, EUR€303 billion).
Manulife Asset Management’s public markets units have investment expertise across a broad range of asset classes including public equity and fixed income, and asset allocation strategies. Offices with full investment capabilities are located in the United States, Canada, the United Kingdom, Japan, Hong Kong, Singapore, Taiwan, Indonesia, Thailand, Vietnam, Malaysia, and the Philippines. In addition, Manulife Asset Management has a joint venture asset management business in China, Manulife TEDA. The public markets units of Manulife Asset Management also provide investment management services to affiliates’ retail clients through product offerings of Manulife and John Hancock. John Hancock Asset Management is a unit of Manulife Asset Management.
Additional information about Manulife Asset Management may be found at ManulifeAM.com.
About Manulife Asset Management Private Markets
Manulife Asset Management Private Markets has investment expertise in several private asset classes, including commercial real estate, timberland and farmland, biomass renewable energy and oil and gas. Manulife Asset Management Private Markets also partners with Manulife’s specialized private asset investment teams to invest in private placement debt, commercial mortgages, private equity and mezzanine debt. Hancock Natural Resources Group, Manulife Real Estate, John Hancock Real Estate, NAL Resources, Regional Power, Manulife Capital, and Hancock Capital Management are units of Manulife Asset Management Private Markets. As at June 30, 2016, Manulife’s assets under management in private asset classes were C$102 billion (US$78 billion), including assets managed by and for Manulife’s general fund and external clients.
Additional information may be found at ManulifeAM.com/PrivateMarkets.
Manulife Financial Corporation is a leading international financial services group providing forward-thinking solutions to help people with their big financial decisions. We operate as John Hancock in the United States, and Manulife elsewhere. We provide financial advice, insurance and wealth and asset management solutions for individuals, groups and institutions. At the end of 2015, we had approximately 34,000 employees, 63,000 agents, and thousands of distribution partners, serving 20 million customers. At the end of June 2016, we had $934 billion (US$718 billion) in assets under management and administration, and in the previous 12 months we made more than $25.4 billion in benefits, interest and other payments to our customers. Our principal operations are in Asia, Canada and the United States where we have served customers for more than 100 years. With our global headquarters in Toronto, Canada, we trade as ‘MFC’ on the Toronto, New York, and the Philippine stock exchanges and under ‘945’ in Hong Kong. Follow Manulife on Twitter @ManulifeNews or visit www.manulife.com or www.johnhancock.com.