The car icon beetles its way along a digitized roadmap as a passenger waits patiently in the cold – two minutes until arrival. Next the car pulls up at its destination, followed by the client’s name verification from their ‘driver-partner’. And so another journey begins.

This is the experience of millions of car-hailing app users of across the world. They take part in a transaction often seen to epitomize the ‘gig economy’.

The term ‘gig economy’ generally refers to low-paid, flexible work which is fed to workers through an app or website. This enables them to do it piecemeal. Around four million Americans are thought to be employed in the gig economy, while it is estimated around 34% of the U.S. workforce are freelancers.[1]

Among other implications, the development of a gig economy has significant potential consequences for inflation levels, and for bond markets.

Where Are Wage Rises?

With many economies implementing higher minimum-wage levels and attempting to protect domestic industries through imposing tariffs on imported goods, the pressure for higher wages should be increasing and then feeding through to overall inflation. However, despite all of these factors, wage inflation is still relatively benign. In addition, unemployment in most major economies is still relatively low. Under normal circumstances this would lead to an increase in wages, yet we have seen very little of this.

The greatest enabler of the gig economy has been the proliferation of smartphones, which have made the processes involved far more efficient. This is one of the factors that has suppressed wage growth over the past few years.

The automation that enables the gig economy does not necessarily do away with jobs, but it does make them quicker and easier to do in a lot of cases. For example, traditional ‘black cab’ taxis in London were a protected sector and drivers had to take ‘the knowledge’ in order to be accepted into the club. This took between two and four years and was a significant investment for the driver. Then car-hailing apps came along and increased the number of cars available, which lowered costs. Meanwhile, navigation apps have essentially digitized ‘the knowledge’ which used to require a great deal of time and energy to learn.

Will Inflation Ever Return?

One of the more intriguing elements of automation is that it is easy for machines to do the things humans find hardest. For example, they can diagnose illnesses based on analyzing scans or symptoms which traditionally required a qualified doctor, or they can scan through pages of documentation to find precedents in court cases, which used to require a qualified lawyer.

Yet machines find it harder to do tasks that humans find easy, such as the service of food and drink. The professional service sector has been the biggest employer for the last two decades, and that is where we could see the biggest change and (negative) impact on wages. That pressure is not going to go away, which begs the question – will inflation ever return to trend?        

Investment Implications

The view in the market may be that fixed-income investors are facing some significant changes – high inflation and high yields – so it will be difficult to make money in the asset class. However, if inflation continues to be suppressed, this will not necessarily be the case. Either way, it may be prudent to consider global opportunities and diversifying into markets where interest rates are not rising, while shorting markets where rates are rising. With careful analysis, we think it is possible to find companies that are doing well and countries acting differently, even in an environment where there is an inflationary backdrop.

Central banks may be moving to more a ‘hawkish’ base, but this has been so well telegraphed that we are not overly concerned about the impact on government-bond yields. We think the move to quantitative tapering may not be as big a negative for government bonds as people would assume because markets tend to price it in. It is risk assets that may be more vulnerable to a sudden increase in volatility.

In the absence of a surge in volatility in equities and risk markets, we expect Treasury yields to be in the range of 3.1-3.4%. The figures are not quite at that level yet owing to volatility earlier in the year, but they have been heading in that direction.

[1] http://money.cnn.com/2017/05/24/news/economy/gig-economy-intuit/index.html

This is a financial promotion. 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. Any reference to a specific security, country or sector should not be construed as a recommendation to buy or sell this security, country or sector. Please note that strategy holdings and positioning are subject to change without notice. ‘Newton’ and/or the “Newton Investment Management” brand refers to the following group of affiliated companies: Newton Investment Management Limited, Newton Investment Management (North America) Limited (NIMNA Ltd) and Newton Investment Management (North America) LLC (NIMNA LLC). NIMNA LLC personnel are supervised persons of NIMNA Ltd and NIMNA LLC does not provide investment advice, all of which is conducted by NIMNA Ltd. NIMNA LLC and NIMNA Ltd are the only Newton companies to offer services in the U.S. In the UK, NIMNA Ltd is authorized and regulated by the Financial Conduct Authority in the conduct of investment business and is a wholly owned subsidiary of The Bank of New York Mellon Corporation. Registered in England no. 2675952. NIMNA Ltd is registered as an investment adviser under the Investment Advisers Act of 1940. NIMNA Ltd investment business described in Form ADV, Part 1 and 2, which can be obtained from the SEC.gov website or obtained upon request. Certain information contained herein is based on outside sources believed to be reliable, but their accuracy is not guaranteed. Unless you are notified to the contrary, the products and services mentioned are not insured by the FDIC (or by any governmental entity) and are not guaranteed by or obligations of The Bank of New York or any of its affiliates. The Bank of New York assumes no responsibility for the accuracy or completeness of the above data and disclaims all expressed or implied warranties in connection therewith. © 2006 The Bank of New York Company, Inc. All rights reserved. Personnel of certain of our BNY Mellon affiliates may act as: (i) registered representatives of MBSC Securities Corporation (in its capacity as a registered broker-dealer) to offer securities, (ii) officers of the Bank of New York Mellon (a New York chartered bank) to offer bank-maintained collective investment funds and (iii) associated persons of MBSC Securities Corporation (in its capacity as a registered investment adviser) to offer separately managed accounts managed by BNY Mellon Investment Management firms.

Important information

This is a financial promotion. 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.

‘Newton’ and/or the “Newton Investment Management” brand refers to the following group of affiliated companies: Newton Investment Management Limited and Newton Investment Management (North America) Limited (NIMNA Ltd). In the UK, NIMNA Ltd is authorized and regulated by the Financial Conduct Authority in the conduct of investment business and is a wholly owned subsidiary of The Bank of New York Mellon Corporation. Registered in England no. 2675952. NIMNA Ltd is registered with the SEC as an investment adviser under the Investment Advisers Act of 1940. NIMNA Ltd’s investment business is described in Form ADV, Part 1 and 2, which can be obtained from the SEC.gov website or obtained upon request.

Personnel of certain of our BNY Mellon affiliates may act as: (i) registered representatives of BNY Mellon Securities Corporation (in its capacity as a registered broker-dealer) to offer securities, (ii) officers of the Bank of New York Mellon (a New York chartered bank) to offer bank-maintained collective investment funds, and (iii) Associated Persons of BNY Mellon Securities Corporation (in its capacity as a registered investment adviser) to offer separately managed accounts managed by BNY Mellon Investment Management firms, including NIMNA Ltd.

Certain information contained herein is based on outside sources believed to be reliable, but their accuracy is not guaranteed. Unless you are notified to the contrary, the products and services mentioned are not insured by the FDIC (or by any governmental entity) and are not guaranteed by or obligations of The Bank of New York or any of its affiliates. The Bank of New York assumes no responsibility for the accuracy or completeness of the above data and disclaims all expressed or implied warranties in connection therewith. © 2006 The Bank of New York Company, Inc. All rights reserved.

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