WE ARE LOSING FREE MARKETS
While the headlines are mostly concerned with the upcoming US presidential election and the state of the market recovery, we should not lose sight of a much more structural development, accelerated by the Covid-19 crisis, with substantially longer-lasting effects. Namely, the regime change marking the end of the 40-year-old neoliberal era and the emergence of state-sponsored capitalism.
In essence, we are losing free markets. The process began with the advent of first-generation unconventional monetary policy and the purchase of sovereign bonds by developed country central banks from 2009 onwards. Ever since then, we have been losing free markets, one by one, slowly but surely, and the Covid-19 crisis extended state intervention to corporate debt markets. It is therefore not because macroeconomic conditions are ultra-stable that the volatility of US Treasury bonds has reached an all-time low of 40 on the MOVE index.
We see two important implications. The first and main consequence is that previously reliable endogenous signals are completely blurred. Second, following on from the previous point, the result is that rule-based investment methods cannot work in a world governed by administrative and political decisions that no system, even one based on artificial intelligence or machine learning, can handle. This means that tactical investment bets are even riskier than ever before.
YOUR STRATEGIC ASSET ALLOCATION IS KEY
In this environment, it is more important than ever to keep a strategic course. In December, we will update the Julius Baer Secular Outlook, as we do at every year-end. One year into the new decade, we seem to have identified the trends for the period 2020–2029 relatively correctly so far. The rise of China as a core asset class, in both fixed income and equities, as well as life science disruptions and, in particular, energy abundance are some of the major trends we see shaping the economy and capital markets in the next decade.
For more information on the Julius Baer Secular Outlook, visit our website here.