Investing themes to watch over the next decade

I used to be skeptical about the risk of Japanisation of the economy but, as a matter of fact, we are facing this issue. Like in Japan, ultra-accommodative monetary policy has little positive effect on growth, negative rates mostly cause financial disruption, inflation is stuck to very low levels and structural factors, such as ageing, are becoming the most important drivers of long-term growth. And, like in Japan, the cost of pretend and extend is increasing. We are all well-aware that monetary policy is not the right tool to stimulate the economy and the disadvantages of negative rates surpass the advantages, but we are doing more of the same and we are slowly reaching the point where central banks are becoming market makers in some market segments. This is already the case in the euro area sovereign bond market. Based on our calculations, central banks at the global level (including the ECB) own around 70% of France’s public debt and around 80% of Germany’s public debt.

At some extend, I tend to agree with some of my colleagues that consider the stock market is the economy. We – and I mean mostly policymakers – cannot afford the stock market falls, as it would lead to contagion effect to the real economy. So much liquidity has been injected in the stock market over the past years, it is now almost impossible to withdraw it. The only solution is to keep injecting liquidity, which explains why around 60% of central banks are easing globally. This is the highest level since the GFC. Higher interest rates and QT are virtually impossible in a world of debt. Looking only at USD-denominated EM debt, it is reaching 3.7 trillion USD, which represents an increase of 156% since 2008. This debt burden is not manageable if interest rates considerably increase. Policymakers are not ready to accept the social cost resulting from the end of the expansionary monetary policy.

What does it mean for investors? If Japan is an example of what the future may hold for many countries, notably in Europe, it is likely that investors will favor the equity market over the bond market. In the chart below, you can see that equities have become the most attractive investment over the past 30 years in Japan. It is easily explained by the fact that the BoJ’s monetary policy has fueled the stock market, especially export companies that have benefited from lower JPY. This may sound paradoxical but, in coming years, it is highly probable that the stock market will continue to perform quite well, and that PER will keep increasing. It does not mean that financial imbalances do not matter anymore. For instance, it is worrying that hedge funds continue to be crowded into just the same 5 tech stocks (Microsoft, Amazon, Facebook, Alibaba and Alphabet) but, in a world of QE infinity and lowflation, there is no other alternative than stocks for investors seeking yield.