Amrit Summan, Investment Strategy Solutions Lead, Ortec Finance, discusses rates, drivers, and the role of technology in navigating uncertain markets.
Andrew Putwain: What are we seeing in areas around those ‘macro themes’ of the past few years (inflation, interest rates, etc.) – can you discuss the drivers and the permanence of what we’re seeing at the moment? What is a long-term trend and what is more short-term?
Amrit Summan: It’s worth reflecting on the economic landscape pre- and post-Donald Trump’s re-election.
At the back end of 2024, we were coming off a year of central banks around the globe implementing rate cuts and attempting to balance the impact of those cuts on rates of inflation. Inflation has remained relatively sticky in parts, particularly services inflation in the UK for example. Nevertheless, there were signs of the global economy moving towards some stability around inflation expectations and inflationary pressures seemed to be easing. Generally, it is expected that inflation will continue to tend towards central bank targets over the next few years.
Similarly, after a long period of uncertainty and consistent with prospective monetary policy, expectations for interest rates in the short and long term were closer to recent levels and indeed may decline. So, the year ended in economic terms relatively quietly.
We then get to post the US election results and the start of 2025. In Q4 2024, there was observed some strong performance of US equities and credit spreads also tightened. This was, in part, accounting for anticipated policies such as tax cuts and deregulation, typically activities that stimulate the economy.
The one unknown, which we now see unfolding, is on tariffs and whether that was pure rhetoric, a means for leverage to enact other policies, or whether it’s a core longer-term philosophy of the current US administration.
As this situation unfolds and given the high level of uncertainty, one clear outcome is increased market volatility. We have already seen the market’s immediate reaction to some policy announcements, and these volatility effects may persist in the coming weeks.
Supply chain disruption is also typically a short-term issue but, in this case, it depends on how the tariffs play out. We saw in recent years the impact of supply chain disruption due to global conflicts, COVID and so on and it took some time for global logistics to improve to manage these impacts.
"If the tariffs persist and apply to energy prices, what does that mean to those economies that are decarbonising?"
The week we’re doing this interview, the tariffs were announced and then a day or two later they were paused, at least with Canada and Mexico. So, the impact on businesses and consumers of those tariffs might be limited, as would be the subsequent impact on the wider economy. We note that the tariff policy regarding China continues to be in place.
On the longer-term impact, it's a much trickier and probably more interesting question because generally, long-term rates are further influenced by more structural issues. None of these are new, and we've seen them play out before, and maybe more are coming to the fore.
For instance, demographic changes, such as ageing populations versus the impact of migration. Are we now in an era of deglobalisation? This is an important question, particularly amongdeveloped countries to consider over the next few years.
The other issue is around energy costs. If the tariffs persist and apply to energy prices, what does that mean to those economies that are decarbonising or those that are managing net zero goals? Do those targets change for some developed economies? Those effects will play off against each other in the next few years, which could be a long-term structural issue.
We're also yet to see fully how AI technology might impact productivity. What does that mean for economic growth – are we going to be more productive, will GDP reflect that, and is it the same for GDP per capita or will there be fewer jobs on the horizon?
This interview is the latest in our ongoing partnership with Insurance Investor. See the previous interviews here and here.
Link to article: https://www.insuranceinvestor.com/articles/short-term-vs-long-term-which-should-insurance-asset-managers-be-focusing-on/
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