The current state of the global economy is one of optimism and caution, with each positive development accompanied by a qualifying statement, according to a leading figure in the wealth management industry.
Economic growth has been more resilient than many commentators expected at the beginning of the year, Simona Paravani-Mellinghoff, Global CIO of Solutions within BlackRock’s Multi-Asset Strategies & Solutions (MASS) group told Spear’s 500 Live, the premier live event for private client professionals, held on 23 May at the Savoy.
Employment reports, PMI indices, and manufacturing data all point to a robust economy in the US and Europe, she said in a keynote speech entitled CIO Outlook: Navigating the economic currents of the next 12 months.
But this growth is occurring against the backdrop of the fastest and largest increase in interest rates globally this century. The impact of monetary policy tightening is still unfolding and could lead to signs of economic distress, such as corporate bankruptcies and rising credit card delinquencies.
Against this backdrop, it was essential to stay diversified, dynamic, and be prepared for both challenges and opportunities.
Inflation: Moderation with caveats
Inflation has been moderating significantly. In the Eurozone, inflation has dropped from over 10 per cent to about 2.4 per cent. But it remains above the 2 per cent target, a pattern repeated across the world, including in the US where medium to long-term inflation is expected to be between 2.5 per cent and 3 per cent.
Structural megaforces, such as the rewiring of global supply chains and ageing demographics diminishes productivity, are putting further strain on inflation.
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‘Whenever I talk about megaforces, I’m basically talking of structural phenomena that have a lasting impact on the market and economies of the medium to long term. let me be clear, as well, not all megaforces are necessarily inflationary in nature,’ Paravani-Mellinghoff explained.
One such deflationary megaforce was Artificial Intelligence (AI), Paravani-Mellinghoff said, citing a recent study published in Science last July, showing that generative AI tools can dramatically increase productivity, particularly for less skilled workers.
AI’s productivity enhancement capabilities could reduce inflationary pressures in the medium to long term, although Paravani-Mellinghoff admitted its immediate economic impact might be limited by the adoption curve and necessary capital expenditures.
Asset allocation
The macroeconomic backdrop of resilient growth and falling interest rates is favourable to risk assets in general. However, this positive story is already reflected in current valuations, which leaves little room for bargains.
Given the resilient growth, Paravani-Mellinghoff said the markets continue to favour equities, especially in undervalued areas such as small caps and emerging market debt. US equities are also attractive, driven by AI-related investments.
Embracing volatility
With looming elections in many of the world’s democracies, including the US, UK and India, and war in the Middle East and Europe, geopolitical uncertainty will likely create a more volatile investing environment.
While volatility often carries a negative connotation, it can also create opportunities when building portfolios, Paravani-Mellinghoff said.
‘It’s important to prepare in periods of relatively low market volatility because that’s the best time to ask ourselves: “Do we have the right toolkit to help us make the decision and implement this decision?” But I also want to emphasise that volatility is not just about challenges, although in most languages that I’m aware of, volatility tends to have a negative connotation.’
The transformative potential of AI
One such area of volatility that can be seen as an opportunity is AI, whose potential to transform the global economy cannot be overstated, Paravani-Mellinghoff, who is also an affiliated professor at Cambridge University.
Critical thinking skills will be essential to effectively leverage AI, ensuring that its outputs are meaningful and accurate.
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While AI may shift the nature of work, it’s important to view it within the broader context of technological advancements. Technologies such as robotics, 3D printing, and AI collectively drive economic transformation. Understanding their combined impact is crucial for predicting future economic and employment trends.
‘I think the the reality is that when we’re thinking about the economic impact of AI, we need to know at scale, broader picture and not to jump to sort of any quick conclusion.’
Diversification and dynamism
In light of significant uncertainties, diversification and dynamism remain the most critical strategies.
Expanding on this theme, Paravani-Mellinghoff said diversification should be comprehensive, and cover asset classes, geographies, and sectors. Dynamism involves having the right governance structure and instruments to act quickly in response to market changes.
‘It’s important to look at diversification through many lenses. This is about diversifying not just across asset classes, not just across geographies and sectors. Really look under the hood of the investment that one makes,’ she said.
‘When it comes to dynamism, this is all about having the right governance structure, but also the right instrument to be able to act very promptly. So, by governance structure, we mean the ability to move portfolios, take decisions quite quickly and implement them quite quickly.’
‘Now, I appreciate that when I mentioned those two things [dynamism and diversification] it must sound as exciting as watching paint dry. But sometimes the smartest thing to do may also be the most boring.’
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