Last updated: 07:58 / Monday, 23 January 2017
2017 prospects

AXA IM: "Secular Stagnation is an Over-rated Concept"

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AXA IM: "Secular Stagnation is an Over-rated Concept"

Research & Investment Strategy of AXA Investment Managers team publishes its prospects for next year focusing not only in 2017, but choosing a theme and medium-term approach to examine the thesis of a secular stagnation, the normalization of economic growth and inflation. They review in turn the root causes of the lack of demand, the low productivity growth based on the absence of technical progress, the drivers of the saving gluts and the end of globalisation. Ultimately their conviction is that secular stagnation is an over-rated concept.

The global lack of demand is fading and can be addressed by an appropriate mix of monetary and fiscal policies. Monetary policy will never be the same as before the Global Financial Crisis: the extension of the tool box is there to last. Fiscal policy has to play its role where possible and this is particularly the case in the euro area, where some, but not all countries, have fiscal space.

In the medium term, the saving glut is set to resorb, while productivity will regain some strength and may even be boosted by the digital economy, especially if structural reforms provide a tailwind. They dispute the idea that technology is “everywhere but in the data” and believe the countries investing most heavily in the digital economy will benefit extensively.

Taking into account their growth estimates and modelling the term premium, AXA IM estimates that US long-term rates should return to 3.4% in the coming five years. This is certainly far from current levels, implying a multi-year normalisation that should radically affect asset allocations.

Given that previous episodes of rising rates have scarcely been smooth operations, they also take a deep dive into financial market stability analysis. The key ingredients of another financial crisis are mostly absent at the current juncture but certain elements may be a cause for concern, such as stretched fixed income valuations and constrained market liquidity.

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