Giordano Lombardo, group CIO at Pioneer Investments comments on the implications of unconventional monetary policy on the long-term outlook for the asset managmeent industry.
“When one door closes, another opens; but we often look so long and so regretfully upon the closed door that we do not see the one which has opened for us” Alexander Graham Bell
Recent weeks have abruptly reminded investors that volatility is not dead. Financial markets again proved vulnerable to rapid changes in sentiment, especially in overcrowded trades, as illustrated by the frantic race to buy European government bonds at any yield level.
We believe that what has happened in May is just the beginning of a new volatility regime. Investors should be aware of the multiple volatility fertilizers that could impact the global economy over the next few years.
Specifically, deleveraging is just in its early stages; growing inequality and the widening gap between productivity
and wages are keeping global demand subdued; structural and cyclical deflationary forces coexist; and Central Banks are running short of tools, having injected a massive amount of liquidity and pushed interest rates close to zero (or even into negative territory).
As we have written many times, the main foreseeable consequence of a sub-par growth world is that, in our view, long-term expected returns for the principal asset classes are projected to be lower than in the past. Furthermore, six years of bull market conditions for both equities and bonds have resulted in a world of tight valuations and investors
should expect the large part of returns to come from alpha and not from beta.
We would like to offer our analysis of the broader implications of this view of the world, focusing on the financial sector and investment policies.