Panel, Conference Presentation
The Age of Asset Management: Harbinger of Stability or Chaos?
Milken InstituteTracy Alloway, David Hunt, Jim McCaughan, Hilda Ochoa-Brillembourg, Ronald O'Hanley, Nouriel Roubini
- Capital flows are expected to continue shifting toward securities markets and direct investment rather than returning to traditional bank intermediation, with banks unlikely to reclaim previous roles within the careers of current participants due to regulatory constraints focused on systemic risk.
- The economy is projected to be approximately halfway through a massive deleveraging cycle characterized by a prolonged lack of demand and latent demand, a condition that will not persist once the cycle completes.
- Future capital investment is anticipated to be more effective and efficient, reducing the absolute capital required for current activity levels, while the need for investment to sustain real growth remains muted due to technological efficiency.
- Without a pickup in capital expenditure, cross-border flows are forecast not to return to pre-crisis levels, and capital investment directions are expected to shift away from less productive models of the 1980s and 90s.
- A significant portion of equity market pricing is currently driven by "bond money" chasing dividends rather than top-line growth, creating a fragile equilibrium that may persist until corporate margins and profitability end as the world enters a new growth cycle.
- Real GDP growth is cited as 0.5% in the first quarter and described as "horrible" by some, though others argue the underlying U.S. economy is growing faster due to product quality improvements not captured in CPI or real GDP calculations.
- Asset management is expected to see a continued rise at the expense of the sell side as rising cybersecurity and safety compliance costs increase barriers to entry, while high corporate profitability is predicted to end with the onset of global growth.
- Emerging market currencies are expected to stop falling and offer attractive investment returns within the next couple of years, provided valuations are sufficiently low despite macroeconomic risks.
- The "risk-on risk-off" environment is anticipated to persist as long as macro drivers remain, creating periods where risk is on or off across many asset classes.
- Future investment returns are projected to be "normal" at 6% to 7% over the long run with volatility remaining high at 17-18%, though investors will face very high volatility even if returns remain low.
- The current 10-year yield of just under 2% is forecast to be fairly typical for the next decade or two if technology drives deflationary pressures, making the achievement of 2% inflation difficult and leading to repeated hits on the Zero Bound.
- Technological advancements, such as driverless cars potentially working within a decade, could increase road capacity by at least 50%, reducing the necessity for current infrastructure projects.
- Asset managers are expected to become more sophisticated, accessing all markets and using direct access venues, while robotic investing and fintech configurations in momentum and price-sensitive forms are predicted to emerge as millennials disintermediate.
- Public pension funds are expected to move toward pension risk transfer initiatives where insurance companies take liabilities off the balance sheet, a trend already observed in the UK.
- Capital flows may be restricted if political risks such as Brexit, Grexit, or resource nationalism escalate, potentially leading to a balkanized system, while the IMF and World Bank are expected to require leadership in reforming charters to manage global capital flows more effectively.
- Unforeseen inflation rates driven by trade interruptions, war, or protectionist policies are expected to require management strategies, alongside a high-probability focus on a low-probability, high-consequence cyber attack on custodial banks.
- In a low-return, high-volatility environment, the ability to add alpha through credible active management is predicted to become more relevant, though there is a risk of huge amounts of money flowing into vaguely described alternatives based on unrealistic return expectations.