In particular, dividend-paying blue chips – better if multinational brands with exposure to EM domestic demand – are to be preferred. The whole allocation should go to DM large caps with cash flow. Stocks (15 percent) – Lacking viable alternatives, and given limits on cash holdings, equities will keep attracting investors, so far satisfied with the “buy on dips” strategy (as long as liquidity-driven markets keep achieving new highs). In the EU, financial sector vulnerabilities will not be tackled head-on and – as much as in Japan – the negative-interest-rate policy will de facto tax banks that hold reserves, without encouraging bank lending. In the long run, only banks able to remain customer-centric ‘trusted advisors’ (i.e.: aggregators of services driven by customer needs, such as personalized cash and wealth management, confidentiality and data protection) will prosper. Technology-driven innovation will boost non-traditional competitors: blockchains, biometric authentication for payment transactions, and new “digital” banks – as consumers will refrain from going to branches. International banks will keep moving away from retail and selling loss-making franchises as a result, local banks will prosper. Yet, regulatory tightening will force traditional banks to choose between lower profitability and sanction risks, and shadow banking will inevitably grow. Increasingly stringent regulations will aim at developing banking systems’ resilience to both uncertainty and turbulence. In other words, a transfer from savers to borrowers (negative returns) and from creditors to debtors (debt restructuring) is the only way to clean up balance sheets whilst maintaining the integrity of the global financial system.īanking: traditional banks under pressure. Without inflation, the easier way to reduce debt is a slow process of sustained negative returns32 and – where possible – some orderly restructuring. As a result, financial repression31 will continue, via negative policy rates. Governments consider public debt write-offs unacceptable (e.g.: Germany’s position on Greece) and private debt write-offs a political suicide (e.g.: Italy’s unwillingness to impose losses on holders of banks’ subordinated debt). While measures to support short-term domestic demand are politically palatable but fiscally challenging, structural reforms to reinvigorate medium-term growth are fiscally palatable but politically challenging, and hence on hold. In Saudi Arabia and Kuwait, the budget deficit could grow larger than 20 percent the Saudi Riyal (SAR) could de-peg from the USD and – along with the Kuwaiti Dinar (KWD) – could suffer a devaluation of more than 20 percent.įiscal policies unlikely to strengthen demand and investment, over-reliance on CBs to continue, financial repression. In the GCC, if oil prices were to decline to 25USD/bbl, real estate prices could drop more than 30 percent. In Turkey, political instability might hamper economic resilience. In MENA the negative spillover of the Syrian, Iraqi and Yemeni conflicts, increasing tensions between Saudi Arabia and Iran, lack of job creation and low oil prices are key risks. In Russia, the middle-income trap, sanctions and low oil prices are major economic challenges.
While India’s risks reside in slow reforms and the rural-urban divide, in Brazil low growth and high inflation could spur social tensions.
Years used runonly to detection five drivers#
China’s unceasing reliance on credit, investment and exports as growth drivers will lead to over-leveraging, financial bubbles and over-heating of the real estate sector, increasing the risk of a disruptive adjustment (i.e.: hard-landing) fast urbanization will increase income disparities. Unusual times call for unusual portfolios: investors should lower their return expectations, and increase exposure to alternatives.ĮMs are fragile. Inevitably, the rising disconnect between fundamentals and valuations will bring about a bear market, if not a crash1.
Liquidity-driven markets will fuel asset inflation and remain jittery. Regulatory tightening will force traditional banks to choose between lower profitability and sanction risks. The over-reliance on central banks (CBs) will continue, leading to further financial repression. Fiscal and monetary policy will not support demand and investment. Political tensions, financial instability, lower oil prices, deflation and competitive devaluations are major economic risks. Instability, populism and authoritarianism will rise. Flat real incomes and rising inequality are major political risks. Developed markets (DMs) will stagnate and emerging markets (EMs) will struggle. Macro fundamentals are weak: high debt and unemployment will constrain performance. Consumption, investment and productivity will remain sluggish, inflation low.