20180611-NATIXIS-The_key_economic_questions_and_mechanisms_for_building_a_long-term_asset_allocation_7页_738kb

Flash Economics: Summary of Long-Term Asset Allocation Considerations

Core Content

This document outlines key economic questions and mechanisms that investors in the OECD (United States, United Kingdom, euro zone, Japan) should consider when building a long-term asset allocation strategy. The focus is on four main areas: long-term growth, long-term inflation, the savings-investment equilibrium, and the required return on equity (RoE) and income distribution.

Main Questions and Views

1. Will Long-Term Growth Pick Up?

• Investment in technology and automation has increased (Chart 1A), but productivity gains and potential growth have declined (Charts 1B and C).
• The Schumpeterian process, where modern companies replace less efficient ones, could lead to higher productivity and growth, but this is not yet evident.
• Low interest rates may be temporarily supporting inefficient companies, but this could change over time.

2. Which Theory of Long-Term Inflation is Correct?

• The usual theory that inflation is driven by money supply growth is not supported by data (Chart 2A).
• The theory that population ageing is inflationary is also not consistent with Japan's experience (Chart 2B).
• An alternative theory suggests that labour market flexibility and wage bargaining power are more important in determining long-term inflation (Charts 2C and D), with more flexibility leading to lower inflation.

3. Impact of the Shift to a Services Economy

• The global economy is moving towards a services-based model, with industry's share declining (Charts 3A and B).
• Services are less capital-intensive than industry, leading to excess savings over investment and lower real interest rates (Chart 3C).
• This shift implies a lower equilibrium real interest rate, which affects the attractiveness of fixed-income assets.

4. Required Return on Equity and Income Distribution

• Modern capitalism requires RoE significantly higher than risk-free rates (Chart 4A).
• This is achieved through income distribution skewing (Chart 4B) and corporate debt leverage (Chart 4C), such as share buybacks and increased debt.
• These factors lead to weak wage growth, low inflation, and increased corporate profitability (Chart 4D).
• This environment is favorable for equities and corporate bonds.

Key Implications for Long-Term Asset Allocation

• Underweight nominal bonds: Due to low nominal yields.
• Underweight inflation-indexed bonds: Due to low inflation expectations.
• Overweight corporate bonds and equities: Due to high corporate profitability.
• Overweight real estate: Due to low real interest rates.

Conclusion

The document suggests that long-term investors should expect a low growth, low inflation, low real interest rate, and high profitability environment. These expectations should influence their asset allocation decisions by favoring equities, corporate bonds, and real estate while reducing exposure to nominal and inflation-indexed bonds.

Disclaimer

• The document is intended for professionals and qualified investors only.
• It is strictly confidential and not a personalized investment recommendation.
• No liability is accepted for any actions taken based on the information provided.
• The views expressed are those of the authors, and may differ from those of Natixis or its affiliates.
• The information is based on public data and not a complete analysis of all material facts.
• Regulatory compliance is emphasized, with restrictions on distribution in certain jurisdictions.
• No guarantees are made regarding the accuracy, completeness, or timeliness of the information.