Balancing cyclical and structural influences in multi-asset investing

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Despite what has been an incredibly tumultuous, unpredictable and at times unimaginable period for global politics and an initially spluttering return to global growth, central banks appear to have successfully steered markets through the worst, ironing out the kinks and at times acting together to present a semblance of global harmony. Sometimes, markets have appeared to simply ignore events that in less interesting times would have caused a rout. Somehow though, it still doesn’t feel that the aftermath of the financial crisis is fully behind us, nearly 10 years on, and we believe it is vital to consider both cyclical and structural forces in building our economic and market outlook.

Cyclical factors can often dominate investor thinking, but typically exert a short-term influence on the markets. We take a two- to three-year view of the world when building our central economic thesis, which guides and anchors — but does not strictly dictate — our investment decisions. For this reason, we also need to incorporate, or at least acknowledge, some of the structural influences that can very quickly become a core focus for investors.

Balancing cyclical and structural factors

When you look at some of our investment ideas, it is possible to see this push and pull of cyclical and structural factors playing out. For example, we expect real interest rates in Europe (government bond yields minus inflation expectations) to rise but, at the same time, we expect eurozone inflation expectations to fall.

The cyclical influence on this idea comes in the form of the limitations of European Central Bank (ECB) monetary policy. During and post the financial crisis, policymakers sought to respond to the collapse in economic growth by pushing down real interest rates. Negative real interest rates were needed to stave off the crisis and, as time has moved on, the result of central banks keeping interest rates low and keeping extraordinarily loose monetary policy in place has been a gradual increase in inflation expectations.

 

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