Inspired by economist Joseph Schumpeter’s concept of “creative destruction”, the unspoken theme of Allianz Global Investors’ most recent Investment Forum seemed to be “creative disruption”. Session topics devoted to three types of disruption – technological, political and investment-related – dominated the event.
Technological disruption begins with the knowledge that productivity growth in both developed and emerging economies has been receding for some time now, in spite of technological change. Academics seem to agree that actual productivity growth may have been underestimated, but a downward trend nonetheless remains.
Technological change is transforming the labour market and is already evident in wage and job trends. Oxford University estimates that about 50% of all jobs are being affected by automation. The study is not infallible, in particular because it ignores new job opportunities, but it does show the impact creative disruption can have.
And then there is political disruption. Just think of the de-globalization trend and the increasingly multipolar world order. History has often been marred by conflicts over the distribution of resources. The same could hold true in the future.
Disruption is also visible in investments. In a world in full flux, traditional backward-looking investment solutions like ETFs might become obsolete. For example, equities now spend an average of just 12 years in the S&P 500 Index; in the early 1960s, it was 60 years!
Productivity growth will probably improve only slowly, as pioneering companies put new technologies into broader use. Inflationary pressure remains limited, with little danger of deflation, especially as President Trump’s administration continues to ramp up its seemingly Keynesian fiscal policy in the late stages of the US growth cycle.
Against this backdrop, central banks have every reason to take their feet off the gas. This change in course is likely to become increasingly apparent at the Federal Reserve and probably also at the European Central Bank, albeit probably agonizingly slowly in the ECB’s case. Both geopolitical disruption and monetary disruption are likely to generate volatility in the capital markets, while government bonds continue to generate zero and, in some cases, even negative yields. So real returns can only be achieved by taking on measured risks. This is why active management is essential!