Risk Management conference 2020
The global coronavirus pandemic has eclipsed the financial crisis of 2008 as the biggest risk event in recent history. And the result of the US elections is likely to bring additional changes to a world already in a state of flux. But what are the implications for asset allocation?
Guidance in answering this question was provided by Union Investment’s 15th annual risk management conference, which was live streamed from the Rheingoldhalle in Mainz for the first time due to the current restrictions. Professor Stephanie Kelton and Professor Harold James joined us live from the US.
How dangerous is Government Debt? - Professor Stephanie Kelton
Stephanie Kelton levelled criticism at the ‘new consensus macroeconomics’ view that still prevails and at how independent central banks have been managing monetary policy up until now. She focused on fiscal policy in particular, an arena in which she believes too much consideration has been given to budget deficits and government debt. Kelton believes that governments are acting too much as if they were managing the budget of a private household whereas, in reality, they have far more flexibility in their fiscal and monetary policy, provided the money is invested for the good of the citizens and economy of the country in question. When looking at deficits, she says it is much more important to determine who stands to gain from the deficit. For example, a deficit could be a clear sign that a government is investing more money for the benefit of the economy, and not necessarily with the objective of immediately getting it back in the form of taxes.
According to Kelton, the current challenges presented by pandemic-related unemployment and efforts to stop climate change offer particular opportunities for strategic investment in infrastructure, education and green tech. In her view, even large deficits do not automatically lead to inflation, high interest rates or sovereign defaults. She says that the coronavirus pandemic has now led many governments and even critics of Modern Monetary Theory (MMT) to reconsider their positions. Kelton was keen to point out that MMT is primarily a way of looking at the monetary and fiscal policy options that are available to governments, and that they are effective whether interest rates are low or high.
Professor Stephanie Kelton explains why government debt is not in itself a threat and how MMT can help to deal with the fallout from the coronavirus pandemic and build an effective response to climate change.
The End of Globalisation? - Professor Harold James
The economic historian Harold James believes that the outcome of the US election will also have consequences for the role of the US dollar as a global reserve currency. He predicts that if international relations normalise as anticipated under the new president Joe Biden, the importance of the greenback as a safe haven for investors will diminish. Biden would therefore succeed in doing what President Trump failed to do during his four years in office, namely bring down the value of the dollar to make US exports more competitive in the international markets.
According to James, other currencies would then gain in importance. He points out that the dollar’s depreciation would not just be caused by the change of president, but also the diminished role of the US in the global economy.
During the interview, the British economic historian Professor Harold James of Princeton University talks about the coronavirus pandemic and what the world might look like afterwards.
The Situation in the Market - Jens Wilhelm
Is a long depression looming because of the coronavirus pandemic? Or is there a greater chance that we are in fact at the beginning of a new stock market cycle? Jens Wilhelm saw a lot of indications for the latter theory. He says that the coronavirus pandemic has led to a rethink of monetary policy and more importantly fiscal policy too. Moreover, the US central bank has introduced a new inflation strategy that will not seek to immediately rein in rising prices.
Nevertheless, Wilhelm anticipates that inflation will increase only once the economy has reached pre-crisis levels. Investors should therefore continue to expect low nominal returns as well as negative real rates of return and steeper yield curves. To tackle the fallout from the pandemic, policymakers will need to target growth rather than budgetary consolidation in the coming years. This would initially entail a growing debt burden, something that Wilhelm believes the central banks will continue to finance. If this is to generate sufficient stimulus for the economy, he says, enormous levels of investment would be required, for example in establishing a digital infrastructure and a climate-friendly and sustainable economy.
The challenge now facing investors is determining which sectors and individual securities might benefit from this. “There are huge investment opportunities here,” says Wilhelm. The start of a new stock market cycle offers very good prospects for risk assets. According to Wilhelm, equities constitute the most attractive of these asset classes. The pricing levels are good, and although volatility remains an issue, he says it should still be possible to earn a risk premium.