Why We Think Volatility
is here to Stay
Geopolitical fracturing, the rise of sophisticated technologies, demographics and climate change all pose threats and opportunities as the world moves beyond the post-financial crisis regime of heavy central bank intervention, according to Shamik Dhar, Chief Economist at BNY Mellon Investment Management.
In an analysis of the current economic and geopolitical climate, Dhar said he did not expect to see any dramatic shift in market fortunes over the next two years.
“We have been in an unusual economic situation for the past 10 years, ever since the end of the global financial crisis (GFC), which was probably the single most important economic event in 70 years. “While we do expect to see normality reappear at some point, the big question is when that will happen and we do not think it is likely to happen soon. At a wider level, too often markets think we are back in the world of the 1980s when inflation was the main threat but I simply don’t believe that to be the case. What is likely to change is the extraordinary monetary stimulus that we saw from central banks. This year should be the first in a decade where central bank balance sheets are shrinking rather than expanding.”
According to Dhar, the expansion of central bank balance sheets in the decade since the GFC helped suppress market volatility. Thus its withdrawal may trigger its reappearance.
“We could be entering a period where we see slightly more volatile markets but it is also a market where active management and buying opportunities could abound more often than they have done in the recent past,” he added.
Within this climate, Dhar believes there is significant lost output to recover. “From 1962 until 2008 we averaged growth of just over 2.5% per year. Since the GFC we haven’t got close to this. In the US, in GDP per head terms, we are now roughly 8% below where we would have been if the financial crisis hadn’t happened (see chart below).
Dhar expects real interest rates to stay very low to negative over the next 24 months, with inflation expectations remaining anchored. He also believes bond-equity correlations will remain negative or low in the months ahead.
Commenting on the shape of the wider geopolitical landscape, Dhar added: “We are in a very different political environment than we were even five years ago. In some sense, against a backdrop of geopolitical fracturing, we are seeing the dismantling of the post-1945 economic and political settlement. How that will work out for the global economy and politics in the longer term remains unclear.”
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GDP per capita: GDP per capita is a measure of average income per person in a country. GDP stands for Gross Domestic Product.
Correlation: A statistic that measures the degree to which two variables move in relation to each other. A negative number shows two assets have historically moved in the opposite direction, while a positive number shows they have historically moved in the same direction at the same time.
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