There’s a new supercycle emerging for the economy, and these are the stocks that would benefit, strategist says
It’s been an interesting summer for financial markets — more or less, a series of mostly downbeat economic data led traders to think the Fed will ease off the pedal, though over the last week they’re becoming less convinced of that view.
Taking a longer lens is Dario Perkins, managing director for global macro at research firm TS Lombard, who says a new macro supercycle is emerging. “The supercycle in inflation and interest rates is ultimately about ‘power,’ and the balance of power seems to be shifting,” he writes. And that power is swinging to labor, even if rate hikes from the Fed and other central banks tip the economy into a recession.
The ratio of vacancies to unemployed workers has surged in the developed world, while the working-age population has decreased.
“A mild recession is not going to eliminate current worker shortages or tilt the balance of power back to capital. Central banks cannot stand in the way of structural shifts, such as deglobalization, climate change and ‘wartime economics,’” says Perkins, who previously worked at the U.K. Treasury and was an economist at ABN Amro.
What does that mean? In the short term, there will be frustration for both bulls and bears, with further gyrations in both bonds and stocks as the inflation/deflation pendulum swings. Ultimately, though, long-term interest rates are going to be higher, and central banks will be fighting to keep inflation below 3%, not below their 2% targets, Perkins says.
“With secularly higher interest rates, investors will no longer be able rely on the continuous rerating of all other asset classes, especially long-duration equities such as U.S. tech stocks. The 2020s will demand a more discerning approach to asset allocation,” he says.
The beneficiaries will be companies with tangible assets — the real economy, so to speak. In a high-pressure economy, there’s a scarcity premium on physical assets, uncertainty about future returns and less benefit to financial engineering, he says. In an era of deglobalization, intangible assets will lose their allure.
“Investors should seek exposure to ‘tangibles’, such as commodities, real estate and many traditional ‘value’ parts of the equity market, which are likely to gain from this transition,” Perkins says.
