The world’s markets are undergoing a seismic change.
Interest rates are rising from 5,000-year lows by central banks around the world, signalling the end of extraordinarily good returns for stocks and bonds.
And, according to Bank of America, that is just one of the crucial themes that will shape the remainder of this decade.
A few significant investment trends that will dominate the remaining 2020s were identified by bank analysts in a note on Friday. The emphasis shifting from the so-called 1% to the other 99% of earnings, the move in gains from equities and bonds to cash and commodities, and the shift in the power equation from capital to labour are some notable changes from the 2010s compared to this decade.
According to the strategists at the company, the COVID-19 epidemic and Russia’s invasion of Ukraine have advanced secular 2020s themes like de-globalization.
The Ukraine crisis has increased US and EU policies regarding energy and defence spending since war is expensive and inflationary. Globalisation trends that dominated for the majority of this century and the 1990s have been reversed as a result of sanctions, embargoes, and protectionism for food and energy supplies.
According to Bank of America, markets should keep an eye out for the transition from Wall Street to Main Street, which will continue for years to come.
According to the researchers, this indicates that more policies of redistribution, regulation, and reshoring to reverse wealth inequality and return everyday traders to the driving seat may be implemented over the course of the next ten years.
Meanwhile, US Treasuries are on track to post losses for the third year in a row, which has never happened before. According to BofA, in order for bond investors to make their holdings the “biggest trade” of 2024, hard-landing facts and bull-price action are now required.
However, the “risk is dollar debasement fears return, causing US dollar gains to reverse” if bond yields don’t decline as anticipated.
Deflationary assets, such as bonds and technology, increased by around 10% in the previous ten years, whereas inflationary assets, such as cash, commodities, and value, increased by 6%. The industries have risen 5% and 4%, respectively, thus far this decade.
Strategists advised “selling US dollar and deflation assets into coming recession, we buy inflation assets such as commodities, real estate, and value cyclicals as recession begins.”
The activities performed by international central banks, led by the US Federal Reserve, have served as the backdrop to all of this.
Strategists argued that the “revolutionary central bank policy” over the previous 15 years resulted in a Fed balance sheet equal to 31% of GDP thanks to 1,343 rate decreases and $23 trillion in asset purchases since the Great Financial Crisis.
“Central bank liquidity supernova caused big asset price inflation, boomer-to-millennial wealth transfer, and in recent years subsidised massive US, UK, & European government spending,” according to BofA strategist
The fact that central banks are currently working to restrict liquidity and that it has decreased by $4.6 trillion since last February has most investors convinced that the next unfavourable development in the economy or financial markets will trigger another “bout of Fed/central bank panic,” in the firm’s opinion.
But much like other key trends of the decade, central bankers’ excessive spending on money is about to be replaced. This decade will be known for that shift because governments are rushing to implement legislation to combat climate change and bring entire industries back home after years of globalisation.
The nominal US GDP has increased by 40% since its pandemic low in the fourth quarter of 2020 as a result of the combined monetary and fiscal excesses of central banks and governments over the past three years.
It has been the quickest expansion in almost 70 years, which, according to the bank, explains why inflation has been so stubborn.