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Text on screen: Kimberley Stafford, Global Head of Product Strategy
Kimberley Stafford: So over the long-term, what are the key takeaways from the forum and what does it mean for investors?
Joachim Fels: Yeah, well, to put it very briefly, the world is fragmenting. There are widening geopolitical fractures out there.
Text on screen: Joachim Fels, Global Economic Advisor
So we're clearly moving from a unipolar world dominated by the US as the sole superpower to something of a multipolar world. What this means is that, first of all, there is elevated recession risk, not only because central banks are in motion, but also because there's a higher risk of geopolitical shocks from all kinds of directions in this environment.
FULL PAGE GRAPHIC: TITLE – Macroeconomic consequences of Reaching for Resilience. The chart shows two columns. The column on the left is titled Growth and Inflation. The first row under that column reads: Higher spending in many areas, including defense, health care, energy and food security. The second row reads: Inflationary tailwinds as companies build redundancies into supply chains and bring them closer to home. The second column is titled Policy and Politics. The first row under that column reads: Central bank dilemma of fighting inflation at cost of supporting growth. The second row shows the higher probability of credit events and default cycles, with policymakers less able to help. The third row reads: Financial deglobalization and more fragmented capital markets.
And I would maybe highlight five macroeconomic consequences, just very briefly. The first one is higher spending by governments and corporate on all these areas, defense, health, energy security, food security, supply chains, and so on could support aggregate demand. However, a lot of that spending is not typically very productivity enhancing, right? So it may divert from other activities that might increase productivity more from other investments.
Second point, this, all of this creates some inflationary tailwinds, for example, making the supply chain more resilient means you're increasing the costs of your inputs. And so we get some inflationary, underlying inflationary pressures from this creeping deglobalization that we are seeing.
Thirdly, as a consequence of the higher inflationary pressures, this really creates a dilemma for central banks. So there's much more of a tougher choice that they have to make between fighting inflation on the one hand and supporting growth on the other. Fourth, central banks will probably not come riding to the rescue as fast and furious as they have in the past, which means that there is a higher probability of default cycles and of credit events than there has been in the past. And then fifth and last consequence is financial deglobalization. So I think we'll see more fragmented capital markets. There may be less capital flowing from developed markets into certain emerging markets and vice versa. Certain emerging market investors may be more reluctant to put their money into the US or European markets, given the experience of Russia with very tough sanctions, even on the central bank's assets.
Kimberley Stafford: Great, thank you, Joachim. So to summarize, this search for resilience comes at the expense of near term efficiency and central banks and governments are probably unlikely to come to the rescue as they have in the past. Fixed income will play a big role. And for our part, we look to build resilience into portfolios we manage on behalf of clients and seek to benefit during periods of market volatility, through active management.
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