Since the Global Financial Crisis (GFC), developed market economies have been stuck in a lower for longer environment – lower growth, lower inflation, lower interest rates and lower expected returns. This has had a pervasive effect on not only the economic and financial landscape in which we operate, but on the political and social landscape as well.
Now, some ten years on, with signs of inflation emerging and with a growing realisation that monetary policy must be supported by pro-growth fiscal policy and structural reform, the question must be asked, are we at the beginning of the great escape from lower for longer?
We believe we are. After almost a decade of operating under a blanket of central bank sponsored liquidity that artificially suppressed the fundamental drivers of the market, leaving them secondary to technical factors. As a result, markets have finally started to price in the end of the unconventional policies that were at the heart of the lower for longer environment.
The catalyst for the move was the election of Donald Trump as the new tweeter-in-chief in November 2016. But Donald Trump is no Steve McQueen. A quick motorcycle jump over a barbed-wire fence will not be part of this escape. Just as it took several years for the environment of lower for longer to become as entrenched as it did, it will take many to escape it. Structural damage has been done to the economy that will take time to heal.
The process has begun. Financial markets, being forward-looking, will start to adapt to life without financial engineering from central banks. In this environment, correlations will fall, fundamental value investing will reassert, and diversification opportunities will rise for multi-asset investors.