In the third instalment of our exploration into ten critical themes shaping the global economic landscape, InvestSense and Hunt Economics delve into two interconnected trends: "The Future Ain't What It Used to Be" and "Geopolitics - Thankfully Not Kinetic." 

Theme 5: The Future Ain't What It Used To Be

This theme highlights a growing pessimism in developed economies regarding future living standards and wealth growth. There is rising doubts in countries like New Zealand, Australia, Germany, and the UK about income growth prospects, with many experiencing 20 years of stagnant real incomes. This stagnation has led to structural changes in consumer behaviour, with less borrowing and spending. Additional fears stem from challenges such as climate change, geopolitical tensions, and economic headwinds. 

Investment Implications:

Short-term:

- Expect reduced consumer spending, impacting consumer goods sectors

- Anticipate lower consumer credit growth

- Be cautious with investments heavily reliant on consumer confidence

Medium-term:

- Prepare for interest rates to fall more than markets currently expect by 2025-2026

- Consider gradually increasing duration in fixed income portfolios

- Look for opportunities in structured credit instruments as supply diminishes

- Expect lower correlations between countries as they progress at different rates

Long-term:

- Focus on countries implementing genuine productivity-enhancing reforms

- Consider "hard currency" countries with low inflation and progressive policies

- Be wary of nations relying heavily on fiscal stimulus and monetary easing

- Look for opportunities in reformed economies, potentially including Japan

Theme 6: Geopolitics - Thankfully Not Kinetic

While regional conflicts remain concerning, competition between major powers is expected to play out through propaganda, political influence, and the weaponisation of capital flows, rather than direct military conflict. 

China is pressuring Taiwan economically through its mainland assets and Hong Kong's financial gateway status, while the U.S. may respond by exerting pressure on Hong Kong due to its reliance on dollar borrowing. In the South Pacific, shifting power dynamics are emerging as China scales back its Belt and Road initiative, while the U.S. and its allies increase engagement. Economic blocs and alliances, such as a U.S.-led maritime alliance with Japan, the UK, Canada, Australia, and New Zealand, are also taking shape.

Short-term:

- Monitor regional conflicts for potential market impacts

- Be cautious with investments in geopolitically sensitive areas

- Don't overestimate traditional defence spending increases

Medium-term:

- Look for opportunities in "onshoring" and supply chain resilience

- Consider investments aligned with emerging strategic alliances (e.g., maritime alliances)

- Be aware of potential economic benefits for countries acting as regional partners for major powers

- Expect increased market volatility due to geopolitical tensions

Long-term:

- Prepare for a more multipolar world with distinct economic blocs

- Consider the long-term implications of reduced globalisation

- Look for opportunities in countries benefiting from strategic realignments

- Be mindful of the potential for weaponized capital flows when considering international investments

As Hunt suggests, we may be entering a period of regime change that will be recognised as pivotal when viewed from the vantage point of 2030 or beyond. This transition is likely to involve not just monetary policy shifts, but also political, productivity, and property market changes.

For investors, the key will be to remain adaptable, look for opportunities in countries embracing reform and productivity growth, and be prepared for a world where economic performance and policy approaches may vary significantly between nations. While challenges abound, there are also opportunities for those who can navigate this changing landscape effectively.

Catch up on themes 1 & 2: China’s Minsky Moment and Asia’s broken model

Catch up on themes 3 & 4: QE Addiction and the Non-Bank Credit Boom