Navigating a world in transition

THE investment landscape is shifting rapidly. Profound uncertainties have emerged on multiple fronts. Years of concerns over deflation have turned into worries of elevated inflation, forcing economic policymakers to reverse stimulus policies. At the same time, the clock for the climate crisis is ticking, pandemic risk lingers on, and geopolitical conflicts and domestic political schisms are growing. There are no easy choices for policymakers and business leaders, and in turn, for investors.

A shift in the macroeconomic regime

The shift to a potentially high-inflation regime has significant investment implications. High inflation not only reduces real returns immediately, but its adverse impact on economic stability raises the risk premia on financial assets. Portfolio diversification will also be more challenging as few assets are spared from the effects of worsening inflation and slower economic growth.

While the increase in inflation caused by pandemic-induced supply disruptions and a strong recovery in demand should eventually fade, the reversal of the longer-term drivers of disinflation is concerning. Secular disinflationary forces in the last 3 decades, including productivity gains from the globalisation of labour and trade, favourable demographics, and the inflation-fighting credentials of central banks, are dissipating. Disinflationary tailwinds may be turning into inflationary headwinds.