The End of an Era: Have We Entered A Great Transition?
Are we on the cusp of a “Great Transition” in global financial markets, or are we likely to revert to the kind of markets seen prior to the onset of the COVID-19 pandemic?
Equity and bond markets suffered record losses in 2022 as central banks took decisive measures to curb inflation. Importantly, liquidity suffered on the back of policy uncertainty and elevated risk aversion, raising fragility risk. These developments have given rise to important questions about the future of financial markets. Some have suggested that we are likely to enter a new era of heightened volatility and inflation. In this paper, we explore four structural triggers of this potential transition:
1. Calls for strategic autonomy through initiatives such as friend-shoring
2. Changes in China in a reversal of globalization
3. Structural changes in the labor market following the pandemic
4. The climate transition
What will be the likely challenges to monetary and fiscal policy in this new era? Will we experience a change in the dynamics of portfolio construction? While these structural changes are bound to exert inflationary pressures, increase market fragility and change the diversification dynamics across asset classes, we outline potential silver linings that may arise from the deflationary effects of technological innovation and productivity benefits from increased labor mobility due to the possible changes in immigration policy.
A New Era of Higher Inflation?
We decompose inflation into permanent and transitory components and discuss the role monetary policy tools can play in a persistent inflationary economy.
Quantifying the Impact of Narratives on Financial Markets
Our experts outline the macroeconomic risks associated with climate change and discuss the challenges associated with the estimation of these risks.