Panel, Conference Presentation
Shifting Tides: A Macroeconomic Outlook
Milken InstituteJohn Defterios, Virginie Afota, Roxanne Davies, Robert A. Gillam, Michael Metcalfe, Alireza Zaimi, Rob, Virginia, Ella Reyes, Brigitte
- Central banks are expected to prioritize growth accommodation over other mandates following the coronavirus shock, with the market anticipating continued liquidity support similar to the "Fed put" observed in December 2019.
- Global growth faced a pre-virus weakness of approximately one percentage point due to the trade war, with China's outbreak potentially reducing 2020 GDP by another full percentage point, creating a risk of significant GDP downgrades and sudden economic stops.
- Speculative positioning in oil futures is anticipated to unwind, potentially causing short-term price drops before longer-term demand growth, driven by institutional flows and emerging middle-class consumption, pushes prices back up.
- Monetary policy tools like negative rates and QE are viewed as permanent fixtures expected to remain in use indefinitely to support economies, while a shift toward active fiscal policy is seen as necessary to address income inequalities.
- Demographic projections indicate global population growth from 7.5 billion to 9.2 billion by 2040 and a doubling of global GDP, with the emergence of 2 billion new middle-class citizens in China and India over the next decade driving a 20% increase in energy demand.
- The Public Investment Fund (PIF) targets $400 billion in assets under management in the near term and over $1 trillion long-term, aiming to create 20,000 direct jobs, hire one employee daily to reach over 1,000 staff this year, and launch new sectors like entertainment and a mortgage refinancing subsidiary.
- Investment flows are expected to increasingly prioritize ESG criteria across energy, water, and food sectors, with institutional money, particularly from European pensions, moving toward sustainable companies and hard assets like farmland as inflation hedges.
- Risk management perspectives suggest Treasury bonds, the dollar, and the Dow are safer bets during crises, while gold and cryptocurrencies serve as hedges, though the latter faces challenges regarding large capital deployment.
- Market structure changes are anticipated as Saudi Arabia and Kuwait prepare for increased foreign flow and Saudi Arabia's graduation to emerging market status later this year, while emerging markets generally show better preparation for aggregate shocks despite localized weaknesses.
- Long-term themes such as healthcare, climate change, AI, and automated cars are expected to drive market dynamics over immediate macro "noise," with the PIF specifically identifying new champions in quantum technology and AI to generate future efficiency and growth.
- A credit market "crisis of confidence" may be required to correct the current underpricing of risk, with potential for $500 billion of investment-grade debt to be downgraded to junk quality if recession-level default rates materialize.
- US economic fundamentals are expected to remain stable with solid job creation despite high deficits, though the performance gap with the rest of the world may narrow if China stimulates its economy strongly, prompting continued investment in Asian markets.
- The retail sector faces structural decimation with a faster brand cycle, making brand valuation recovery difficult, while the PIF maintains less leverage and solid credits in the UAE and Saudi Arabia to navigate different economic cycles.