7 economic trends to watch

A new Manulife Asset Management report outlines seven themes that will likely underpin macroeconomic and market dynamics going forward.

In the report, Manulife chief economist Megan Greene and co-head of asset allocation Robert Boyda take into account global developments that have occured over the last 20 months. They also examine what these developments could mean for policymakers and investors.

Read: Is the oil price shock behind us?

The report lists the following themes.

• 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.
• Currency actions. Countries are hoping to boost their own demand and growth by increasing their competitiveness via weaker currencies. Read: Trouble still brewing for the loonie, says CIBC economist
• Regulation glut. As capital requirements for other assets rise, investing in sovereign bonds has become more attractive from a capital cost perspective.
• Demographics. Aging populations are encouraging many investors to shift into fixed income and away from equities.
• Low government bond yields. Secular stagnation and easy monetary policy are likely to mean the continued compression of government bond yields. Read: Challenges for fixed-income investors
• Low inflation. Lack of global demand is expected to translate into little upward pressure on inflation, with many central banks missing their inflation targets.

Risks and opportunities for investors

It’s no secret that central bank intervention is affecting economies and markets.

Says Greene, “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,” according to recent Bloomberg data.

“Central banks have become a dominant player in the fixed income markets,” she continues. “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.”

That’s why it makes sense for policymakers to turn to fiscal stimulus to spur growth, Greene notes. But the political calendar over the next 12 months could restrict the ability of governments to act, particularly due to the rise of an anti-elite, anti-globalization discourse.

Read: How globalization is changing the game for central banks

According to Greene, “This [discourse] 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 investments or consumption.”

Look past bonds

“Bond investors will not get much out of conventional fixed income for some time,” says Boyda. “We see potential value in a much more active, opportunistic, flexible and risk-aware approach, [given] the search for yield may require a global focus with attention to coupons, safety, currency and policy-driven risk.”

He points to emerging market debt and high yield bonds, but notes, “It may be difficult to find value outside of special situations driven by periodic global dislocations. […] This means embracing volatility and uncertainty, which provide opportunities.”

Read:

• How to maximize bond returns
• Find yield in volatile sectors

Boyda adds, “In a low-growth world, valuations are full for U.S. equities. European equities could offer opportunities for those willing to look past crises, [but] we think it is still too early.”

He concludes, “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.”

Read the full report.