Economic and Market Commentary

The Future of Globalization and Central Bank Independence

Investors should brace themselves for a very different investment landscape in a post-COVID world, as globalization and central bank independence are likely to be diminished.

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Tina Adatia, Fixed Income Strategist: The crisis is of course going to leave some scars on a post-COVID world. What are these and what do investors need to consider for these?

Joachim Fels, Global Economic Advisor: Yeah, Tina, I think there will probably be two victims of this crisis. The first victim is likely to be globalization as we know it.

Chart: The line graph depicts the intra-industry trade between the U.S. and China (% of goods trade) from 1962 to 2016 on a steady increase, with moderate peaks and troughs during the period.

And the reason is that many companies are realizing that their supply chains became too complex over the last 10, 20 years. Supply chains were optimized, just in time production, relying on the ready availability of swift transport and all that. So all of this is going to change. So companies will look to onshore parts of their supply chain. They will look to build redundancies within the supply chain in order to be able to weather future disruptions. Also, I think you'll see more lasting restrictions to travel by some governments. And on the demand side, you will see maybe less willingness to travel by many people, even once the virus is under control. So what this means is, this will hit those economies, sectors and companies most that have benefited most from trade and from tourism. So that's the first victim, globalization.

The second victim of this crisis could well be central bank independence as we know it.

Chart: The triple line graph highlights fiscal- monetary coordination between the Federal Reserve, ECB and BOJ from 2009 to 2020. Holdings (% of outstanding government debt) remain the most steady for the Federal Reserve, holdings remain steady and then begin to increase in 2015 for the ECB and holding start steady, begin the steepest increase in 2013 and then steady in 2016 for the BOJ.

And the reason is that we are likely to see a massive further increase in government and private sector debt. Governments and the private sector will need all the help they can get from central banks in the form of low or even negative interest rates and in the form of more government bond purchases by central banks. And we think it will be very hard for central banks to deny this form of help even if inflation rises over the medium and longer term. So I think one of the remedies will be that central banks will cap yields, either directly with various forms of yield curve control, or indirectly by just buying large amounts of government bonds even at a time when inflation rises. So this is one of the ways how we can address the rising debt that we are likely to see in the public but also in the private sector.

Andrew Balls, CIO Global Fixed Income: By the way, just one thing to add, back to the shorter-term outlook, we focused a lot on the U-shaped baseline, the risks, the downside risks to that baseline. There are also upside risks. Let's hope that there are medical breakthroughs in terms of vaccines or treatment which could lead us to over time upgrade some of our forecasts compared with the baselines. In the cyclical outlook in a lot of our thinking, we are more focused on the downside risks. Unfortunately, that's where we think the balance of risks are in the short term. There is an upside risk case as well which is possible we would see some of that realized as well.

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CMR2020-0415-1152048

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