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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.
Transcript
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.
Brendan Mulhern
Global strategist, Real Return team
Martin Chambers
Credit analyst, fixed income
Vivek Gautam
Global research analyst
Our key areas of focus
Debt burden
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.
Asset inflation
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.
Liquidity risk
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.
State intervention has played a key role in the financialisation of the economy. What other effects does state intervention have on the investment landscape?
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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.
