Conference Presentation, Panel
Global Capital Markets: Deflation or Stabilization?
Milken InstituteThomas Finke, Afsaneh Beschloss, Mohamed El-Erian, David Harding, Joseph Hooley, Steven Tananbaum, Tom Fink, Jay Holey
- The global economy faces a continued slowdown as advanced economies exhaust traditional monetary policy tools, leaving only rates, balance sheet adjustments, and verbal guidance, while non-traditional fiscal actions and productivity gains remain uncertain; specifically, Japan may face three to four recessions, the Eurozone risks deflation with five years of flat productivity, and Brazil and Russia have entered deep recessions, while China transitions from 9–10% growth to a new baseline of approximately 6.5%.
- Global growth is expected to become more uneven and unstable, shifting from a "new mediocre" of stagnation to a "T-junction" where future outcomes are determined by political decisions rather than pure market forces, with advanced economies facing anti-establishment political movements and China undertaking a historically difficult middle-income transition where only five nations have succeeded in the last century.
- Emerging markets are projected to grow at twice the rate of developed markets driven by demographics, better fiscal tools, and productivity, though they face "volatility of volatility" potentially exceeding 2008 levels, characterized by "manic-depressant" capital flows that drive valuations to extremes, despite improved policy quality and reserves that better shield against capital flow shocks.
- Specific investment opportunities exist in emerging market credit where the sector is transitioning from fear to hope, with quasi-sovereigns like Pemex and Minas trading at spreads of 300 and 350 basis points respectively compared to historical baselines of 25–50 basis points, and structured products offering potential yields of roughly 100% over risk-free rates with relatively low risk.
- China's economic trajectory involves a "bumpy" move from export to consumer and service-based models, with rapid expansion in electric vehicles, solar, IT, health, and education starting from low bases, alongside the management of a massive equity market bubble and the potential disruption of traditional energy demand if 15–20% of U.S. and Chinese car sales become electric.
- Advanced economies are experiencing flat productivity, which may stem from measurement issues failing to capture the new economy, a transition period where technology investments like driverless cars have not yet yielded gains, or the disruption of traditional business models by companies like Airbnb and Uber that utilize underutilized assets.
- Asset values are described as the discounted value of future income streams over 20 to 40 years, implying that short-term growth ebbs and flows do not significantly affect them, though emerging markets exhibit "sawtooth patterns" and speculative bubbles driven by behavioral biases and a "love affair" with yield that often ends well for borrowers.
- The liquidity environment in credit markets is described as "very similar, if not better" than in the past, with end-buyers becoming larger and banks shifting from lenders to facilitators, while private equity, hedge funds, and peer-to-peer platforms fill the "hybrid zone"; however, bonds may no longer provide traditional risk mitigation, necessitating a view of cash as a source of resilience and agility.
- Future market dynamics are expected to be range-bound with a wider range and higher frequency of oscillations, rendering standard diversification less effective for risk mitigation, while structural changes in markets like India are required to allow tax-exempt foundations to invest in local public equity, and fintech developments are predicted to accelerate in the institutional asset management sector over the next few years.
- Significant risks include the potential for Argentina's liquidity to vanish if political or economic policymaking falters, the "two fundamental views of the EU" impacting stability if the UK votes to leave, and the possibility that "poorly understood" productivity models lead to incorrect investment positioning, all while investors must prepare for scenarios where distressed assets like coal company bonds could turn into good investments.