The distinct challenges facing the central banks were a central topic on day two of Alfi’s European Asset Management Conference in Luxembourg.
The session, titled ‘The new playbook for investors in volatile times’, was given by Wei Li, global chief investment strategist, Blackrock, and also discussed the ending of the “great moderation”.
The world has shifted from a period where demand shaped it to a period where supply constraints shaped it, explained Li.
Structural forces, such as ageing demographics and geopolitical fragmentation, are leading to structural labour shortages and reshoring and duplication in supply chains, which is resulting in higher inflation.
Additionally, the net-zero transition represents a series of supply shocks, unlike those experienced during the pandemic, stated Li.
Li pointed out that the economic cycles were effectively mitigated during the era spanning from the late 80s until the pandemic. However, that period has come to an end, and in the current assessment, the role of central banks is a “lot tougher” because their tools are not as effective in addressing the “supply side of the equation.”
In this scenario, central banks hiking rates will not solve the “supply bottlenecks that have been straining economic activities and leading to higher inflation,” warned Li.
Central banks can continue to use what they know best, which is hiking rates, but the parts of the economy that respond to central banks’ aggressive rate hikes are not responsible for inflation, she added.
Li also discussed the trade-offs facing central banks, stating that either bonds or equities will suffer depending on what central banks choose to do.
“If we think about the great moderation period, we had 40 long years of equity boom market and bonds boom market for such a long time, and that was literally too good to be true,” Li said.
In this new environment, the cost of getting the equity bond mix wrong is four times as high as during the great moderation. Hence, getting the equity and bond mix right matters much.
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