ANDPAPERS Q4 2020 | CENTRAL BANK MANTRA ‘LOW FOR LONGER’
BY LONDON & CAPITAL INVESTMENT TEAM
The release of this outlook coincides with the 6-month anniversary of when the UK first entered lockdown. As households and companies adjust to this COVID-19 dominated era, so must investors. One of the main conclusions is that the combination of VUCA (Volatility, Uncertainty, Complexity and Ambiguity) is the highest that we can remember.
- We have entered a period of higher market Volatility as the COVID-19 crisis ushered in an era of fiscal dominance i.e. central banks will continue to matter, but the main driver for the global
economy will be fiscal support.
- There is high Uncertainty around the evolution of the virus, and therefore around the behaviour of consumers around the world. This is very important as any meaningful economic recovery has to come from private consumption demand reverting to levels of the past (not easy given higher unemployment and fragile consumer confidence). There is Uncertainty, as well, in regards to the outcome of the imminent US Elections.
- We have Complexity on some of the issues, like the Tech Wars that the US and China continue (and will continue) to fight.
- Finally, we have inherent Ambiguity coming from politicians. This week alone, we are seeing a continuation of ambiguous messaging around the fight against COVID-19 in UK and a US President that refused to confirm any peaceful transfer of power irrespective of the result of upcoming elections.
As the global economy has rebounded from the shock of a lockdown, central banks have provided a sobering message on the enormous challenges that still remain. The US Federal Reserve
(Fed) has initiated a significant shift in approach, emphasising the “low for longer” mantra and highlighting the deflationary shock and huge labour market dislocation that requires unprecedented accommodative monetary policy. It has ostensibly set out the blueprint for other major central banks. This quarter we examine the new monetary backdrop and some other key issues that are shaping our asset allocation.
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