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The financial sector has come to dominate the real economy, which creates systemic risk. How do we incorporate this knowledge into our analysis?
A finance frenzy
The scale, complexity and interconnectedness of global financial markets has mushroomed with modern financial architecture increasingly built on complex financial instruments that depend on liquid and continuous markets. Further impetus has come from inflationary monetary policies and the dominant central-bank belief in not leaning against financial excess.
The growth of the financial economy has outpaced that of the non-financial economy, creating an unbalanced system ripe for corruption and distrust. The scale of global finance remains much as it was in the run-up to the 2007-8 credit crisis and remains a source of systemic risk.
Our financial focuses
We tend to examine our financialisation theme through the lens of the world’s soaring levels of debt, the inflation of asset prices, and the liquidity risk still present across the world after the global financial crisis. This shift in the financial sector and its implications for the rest of the world’s industries and governments are worth keeping front of mind as we aim to use the instruments and companies in this area to generate returns.
Cheap money has caused rapid growth in a sector already supported by deregulation. ‘Financialisation’ investigates the implications of finance dominating economic activity, instead of serving it.
Meet the team
We have a research group for each theme, made up of analysts, portfolio managers and other members of the investment team, that collaborate on new thematic ideas and analysis. Here are the co-leaders in the financialisation theme group.
Global strategist, Real Return team
Credit analyst, fixed income
Global research analyst
Our key areas of focus
A series of developments have reduced the constraints on the world’s financial system to create debt and credit. These include the abandonment of the gold standard (which linked the value of paper money directly to gold), increased adoption of inflation-targeting central banking, a structural decline in interest rates, and the globalisation of finance. This has led to a structural increase in debt relative to income (GDP), leading to greater financial vulnerability.
Monetary intervention and credit inflation has underpinned an inflation of asset prices (financial and non-financial). Returns from asset prices have outpaced income growth, leaving them particularly vulnerable to changes in economic/market conditions.
The functions of a global reserve currency are paramount to the health of the global economy. A global reserve currency, by definition, has to be reasonably and efficiently accessible in all parts of the world. Prior to the 2007-8 financial crisis, the private-sector financial system ensured this was the case. The experience of the post-crisis period indicates that the financial crisis marked a structural break in the operating of the global financial system. While the crisis is over, global liquidity now ebbs and flows, and with it the availability of US dollars. A deterioration of dollar liquidity leads to economic and market weakness and vice versa.
A deep dive into…
Modern Monetary Theory
At its core, MMT is the recognition that government spending is not constrained by how much the government can tax or borrow. What does this mean for the global economy?
Financialisation has been made possible by technological advancements and our increasingly connected world. Our net effects theme considers the profound implications of increased connectivity for a host of industries.
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This is a financial promotion. Issued by Newton Investment Management Limited, The Bank of New York Mellon Centre, 160 Queen Victoria Street, London, EC4V 4LA. Registered in England No. 01371973. Newton Investment Management is authorised and regulated by the Financial Conduct Authority, 12 Endeavour Square, London, E20 1JN and is a subsidiary of The Bank of New York Mellon Corporation. Newton is providing financial services to wholesale clients in Australia in reliance on ASIC Class Order 03/1099, a copy of which is on the website of the Australian Securities and Investments Commission, www.asic.gov.au. The Class Order exempts entities that are authorised and regulated in the UK by the FCA, such as Newton, from the need to hold an Australian financial services license under the Corporations Act 2001 for certain financial services provided to Australian wholesale clients on certain conditions. Financial services provided by Newton are regulated by the FCA under the laws and regulatory requirements of the United Kingdom, which are different to the laws applying in Australia.
Material in this publication is for general information only. The opinions expressed in this document are those of Newton and should not be construed as investment advice or recommendations for any purchase or sale of any specific security or commodity. Certain information contained herein is based on outside sources believed to be reliable, but its accuracy is not guaranteed. You should consult your advisor to determine whether any particular investment strategy is appropriate. This material is for institutional investors only. Past performance is not a guide to future performance. Your capital may be at risk. The value of investments and the income from them can fall as well as rise and investors may not get back the original amount invested.
This material is for Australian wholesale clients only and is not intended for distribution to, nor should it be relied upon by, retail clients. This information has not been prepared to take into account the investment objectives, financial objectives or particular needs of any particular person. Before making an investment decision you should carefully consider, with or without the assistance of a financial adviser, whether such an investment strategy is appropriate in light of your particular investment needs, objectives and financial circumstances.
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