Retrospective 2010-2019
“We have characterised the current decade as a US technology-led bull market.”
Let us begin with a retrospective: the current decade has started on the ruins of the worst financial crisis since 1929. Its beginnings were marred by not only the 2008 financial crisis, but also the Eurozone crisis, coupled with the austerity imposed by force on the peripheral countries of the monetary union.
Meanwhile, a mere ten years after the dot.com crash, the Nasdaq index and its current epicentre, the famous FAANMG stocks (Facebook, Amazon, Apple, Netflix, Microsoft and Google), rose to leadership status. The FAANMGs became an asset class in themselves, with a market capitalisation of over 4 trillion USD. We have thus characterised this decade as a US technology-led bull market, similar in some respect to the booming 1990s.
Transitioning into the new decade
“We can clearly discern the asset class leadership from one decade to the next.”
The rise and fall of asset classes from one decade to the next should not come as a surprise. Humans tend to extrapolate the recent past and miss the repeating patterns that reveal themselves by looking back. In 2000, the future seemed bright and certain for tech and not so much for Asia. No one could predict the dot.com bubble at the time, nor the bull market in emerging economies in the later part of the decade. In the same vein, come 2010, it was difficult to foresee the return to leadership of American technology stocks after their disastrous performance in the 2000s.
In fact, looking back at the last six decades, we can clearly discern the asset class leadership change from one decade to the next. That is to say, the asset classes that perform best in one decade generally do not work in the next, and vice versa - especially when it comes to equities and the dollar. At the index level, equities therefore seem to have mean reversion properties. The Euro-US dollar exchange rate, as its equivalent from twenty years ago, the Deutsche Mark-US dollar exchange rate, also seems to have a tendency to reverse to the mean.
“Transitions do not happen overnight.”
That said, these kind of leadership changes do not happen abruptly from one day to the next. It’s a protracted process with several milestones. Note that at the time of writing, the trends that have been in place since 2010 are still in force. Trends have been strong for several years, as the FAANMGs are now, before investors realise it. However, we expect them to give way to new ones.
Outlook 2020-2029
Let us now take a look at a few of the main trends we envisage for the coming decade:
“We might see the adoption of unorthodox macroeconomic policies.”
First, monetary policy has reached its limits working in isolation in developed economies. The urgent need to stimulate nominal GDP growth in the developed world should gradually lead to the adoption of unorthodox macroeconomic policies. Fiscal stimulus should eventually be coupled with monetary stimulus, for example through direct liquidity injections to households rather than indirectly through the financial system. This could take an almost unprecedented form such as negative taxes, facilitating the redistribution of purchasing power to the lowest income groups.
“Returns on listed equities will seriously challenge returns on unlisted assets in the coming years.”
Second, the past decade has seen Private Equity become a mainstream asset class. One of the consequences of investors’ enthusiasm for unlisted assets is that the historical illiquidity premium they offered has probably been significantly reduced or even completely eliminated. As a result, returns on listed equities will seriously challenge returns on unlisted assets in the coming years.
“A bipolar world is in the making.”
Finally, the strategic confrontation between Beijing and Washington will lead us to a bipolar world. Investors will have a choice between assets dominated by the US cycle and its technology ecosystem and assets dominated by the Chinese cycle and its own technology ecosystem. These two capital markets of the two largest economies in the world will therefore be fundamentally uncorrelated. As a result, the merits of international diversification will be revived after thirty years of increasing correlations due to globalisation.
The identification of secular forces is the first step in Julius Baer’s asset allocation process. We believe that markets are fundamentally less uncertain in the long term than in the short term. Having a clear view of the structural forces driving the market gives us an edge when it comes to cutting through noise and navigating short-term changes.