11 January 2019
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Head of Asset Management in Asia, Paras Anand, Wen-Wen Lindroth, Senior Credit Analyst and Marty Dropkin, Director of Research for Fixed Income talk to host Richard Edgar, Editor in Chief, about where they see the world in ten years.
Richard Edgar: Today we’re thinking about the world in 2029. How will we be investing in a decade's time? It's hard enough forecasting what's going to happen tomorrow - ten years is a very long time but we're going to give it a go. What can global markets look like, for example? Will a worldwide recession have reset the economic and corporate clocks? What about the world of asset management itself? How will changing tastes and technology affect the way we invest? Could they even change the way we define investing? And what about ourselves? How might shifts in social norms and gender equality and other issues around diversity affect our approaches?
Joining me in the studio to guide us through these questions and lead us to what I hope will be the sunny uplands of 2029 are Fidelity's Head of Asset Management in Asia, Paras Anand, Wen-Wen Lindroth, Senior Credit Analyst, and Marty Dropkin, Head of Research for Fixed Income.
Paras, first of all, when we're looking at the world in 2029, 10 years from now, are you a glass half full or a glass half empty person?
Paras Anand: So if we're talking about the real economy, the global economy, I'm definitely in the optimistic camp. There's quite a big conversation out there at the moment that says that we've had a very sort of extended economic cycle, where we're very ‘late cycle’ is the term I hear a lot. And that there is a kind of an expectation that a recession is inevitable. And the debate is really around how deep will that recession be. Whereas I look at many factors within the global economy and could see that actually as we look at 2019 and actually for sort of five, 10 years beyond that, we may actually be in an extended period of growth for the real economy.
Richard Edgar: So that's all right then. Wen-Wen, let me come to you. You work in credit. Do you share this optimistic view about the economy as we go forward?
Wen-Wen Lindroth: Well, I think the underlying drivers when I look at the US are pretty healthy. Not quite so sure about Europe. I think one maybe out of consensus view I have is that we could see some strong growth in the real economy but have the markets not perform quite as well over the next 10 years.
Richard Edgar: Ok. And Marty, how about you? What should we be looking out for as we approach the 2020s?
Martin Dropkin: I think the thing we need to be prepared for is what does the world look like in a low rate environment if we if we need to think about that for the longer term. So rates have clearly risen this year although have backed off a little bit from that. But I think given the state of growth and given the outlook for inflation we're probably going to be prepared for a lower rate environment for some period of time.
Richard Edgar: Long enough to take us through to 2029?
Martin Dropkin: It's a long way off so it's hard to say for that long of a period. But I do think we might be in this sort of blissful state where we see a modest amount of growth in the overall economy and a reasonably low rate environment that will keep things moving along in a similar direction.
Paras Anand: I would definitely sort of challenge that view.
I think this idea that we are going to sustain a low rate environment, is very much the kind of the environment that we've been in over the last 10 years, it's really the direction we've been in really in the last sort of 30 years. We are classically unprepared for what a change in that environment looks like. And I think one of the things that could take us in that direction is if, for example, we saw that a tightening of monetary policy actually caused the economy to accelerate. And the question is, how could that happen? That seems a very counter-intuitive perspective. But effectively I think that what's happened is we've continually reduced the price of money; is that actually the velocity of money has collapsed. So, the multiplier effect that people think that you would incur by increasing the stock of stock of money has not been there. So perversely you get to a point where you increase taxes so much that there’s actually a lower propensity to pay taxes. So you have this almost inverse correlation: so you start tightening monetary policy, obviously that has a positive knock on effect to the profitability of banks, banks are prepared to lend again, the multiplier effect kind of kicks in. And in those sorts of circumstances you end up with inflation that you're not really prepared for.
Richard Edgar: But first of all, you were nodding along to this, Marty? And we're talking about a big picture here. You were talking about the 30 years that have been. As we look forward to the next 10 - in that big picture sense - does that make sense?
Martin Dropkin: Where I agree with Paras is on a sort of one or two-year view with the tightening of monetary policy. I'm fully expecting - as are many people - an increase in volatility, we've already seen that in the last few months. I think we're in a world where that will continue. The other side to that argument is demographics; with an aging population the need for refinancing of central bank issuance that's going to continue to keep pressure on deficits. There's going to be this counterbalancing effect where central banks and others are going to have to manage down the rates in order to just keep the economy going; to maintain a balance between the cost of debt and the need to refinance that debt.
Richard Edgar: Because it's a very distorted world, isn't it? Particularly over the last 10 years in terms of the money that has gone into the system; pumped in there by central banks. Some are arguing that we need almost a violent disruption of the status quo rather than the slow mechanism of demographics that you're talking about, Marty. But something much more violent, Paras, to change the landscape.
Paras Anand: Yes. And I think that the disruptive factor that comes into play is that for a very long period of time - it could be the next three or five years - I think that the central banks will position themselves very much behind the curve. But there will come a point where if they feel that they're not able to control the economy you end up with some step changes. But I think what we should also emphasise is that the types of things that we're talking about, if they do come to pass, will actually benefit a lot of people in the real economy.
Richard Edgar: How so?
Paras Anand: Because, for example, you get returns to labour the like of which you haven't had for the last 10 or 15 years or so. The equation between the returns to labour versus the returns to capital will be reordered.
Richard Edgar: And how will that mechanism happen? What will be the driver for that? If you start to see wages go up; the massive accumulation of wealth with the asset owners that starts to reverse somehow. How is that happening?
Paras Anand: Let's talk about your starting point at the moment. You're looking at most economies, most large blocs - whether it's Japan, whether it's even here in the UK or the US or Europe, your starting point already is unemployment is quite low so there's not a lot of slack in the system. So any environment which describes the idea that demand surprises on the upside over the next three to five years then the valve that moves is going to be real wages.
Richard Edgar: Ok, so that's the people side of it. Wen-Wen, if I turn to you. You would see a compression in margins - if wages are going up - for these companies. What would the impact be there? Because we've had companies that have been sustained for a long time, they've been able to carry on because there's not so much inflation, there's cheap money keeping them going. How would that change?
Wen-Wen Lindroth: I think we will see wage inflation because of the lower slack, as well as just political pressure in several different countries. In the US, for example, a few years ago, the election of Trump, also the rise of Bernie Sanders in my mind is very much in line with the populist fervour, the populist movement. Those who perhaps lost out over the last 20 to 30 years really coming back to bear on the political landscape.
Richard Edgar: There's a rise in populism in many, many places around the around the world. How will that - again if you take this on a 10-year view - how do you think that might have shaped things? I mean it’s an impossible question because it's so broad and so long in its view, but the tectonic plates are definitely shifting, aren’t they?
Wen-Wen Lindroth: Yes, absolutely. But you know this can also happen through gradual or peaceful means.
So as costs go up, and labour costs do form a major part of the cost structure of most companies, as those costs go up and there is more return to the workers as opposed to their shareholders, as Paras has pointed out, that means that profit margins are going to go down. And I guess back to my original point, I think that could also mean pressure on securities.
Richard Edgar: Primarily your concern is whether these companies that you cover are going to be able to honour the debts that they've taken on. Do you get more worried as you look at the landscape as it as it begins to change?
Wen-Wen Lindroth: Certainly anything that reduces cash flow is an issue for credits and so from my point of view obviously it's a threat. But at the same time, I think we should also recognise that the way that excess value has been allocated over the last 30 years and the way more and more has gone to shareholders - that's a trend that could perhaps be reversed without necessarily really damaging the underlying corporate.
Richard Edgar: Marty?
Martin Dropkin: Picking up on Wen-wen's comments, there’s a tangent here and sort of tying in what Paras was mentioning.
There's this underlying premise that growth is good. The topic I've been reading a little bit about recently is that growth isn't necessarily always good.
Richard Edgar: That’s a fascinating concept sitting where we’re sitting right now.
Martin Dropkin: Well, let’s think about it in the world of sustainable investing and the environment and the impact on our climate where coal-fired power plants are increasing the temperature in the world.
Richard Edgar: The wealthier we are the more we consume and the more of the world’s resources we’re consuming.
Martin Dropkin: Exactly. Growth leads to the need for more power plants, leads to more toxic things put into the environment. So what if we end up in a world where - and it's a bit conceptual - where we decide that we need to reduce the amount of output and that is considered for the greater good of humanity? I know it's a bit pie in the sky but it is a concept out there and you can see over the next 10 years, with pollution on the rise, that this is a concept that will become a reality in many countries.
Richard Edgar: Paras you talked about a different way of measuring growth but perhaps it's a different way of valuing things altogether, whether it's assets or whether it's the way that an economy is developing.
Paras Anand: Yes. Whether we look at the level of organisations or we look at it at the level of economies we will have a much deeper sense of balance or looking at things in the round. So whilst I would disagree with Marty - I think we are likely to see and will continue to see growth in the economy - I think there will be a much greater attenuation to the broader stakeholders within that sort of growth. I think where we're moving from is a world where we had a very singular concept of what good growth was.
Richard Edgar: It is an interesting point though, isn't it? If we’re using up the world's resources, I wonder if in 10 years’ time the way you value assets might not be based on profit or the EBITDA - it’s not going to be the same calculation.
Paras Anand: Yes. I think my theory on this is that much more will be it will be based around the view of duration. So if you look at the fundamental acceleration that we're seeing in the creative destructive process around corporates: going from 40, 50 years about 25, 30 years ago to what’s forecast to be 14 years and probably lower by the time we get to 2029, then actually there will be much more attenuation to terminal value than there will be in terms of short term profits.
Richard Edgar: Ok. Wen-Wen?
Wen-Wen Lindroth: I just wanted to add to this idea that maybe our parameters are changing. Maybe going forward it's not going to be all about earnings per share or return on equity. We are looking at other ways to value companies and attach long-term value to them. But I think that definitions and parameters are getting redefined on all different fronts as well. For example, we're rethinking GDP and questioning whether that is the right way to measure growth and sustainability in an economy.
Richard Edgar: That brings us to our next topic actually which is about the disruption within asset management itself. Marty, let me let me come to you. Do you expect that to continue? Where will the industry be in 2020?
Martin Dropkin: Clearly, we're in a world where fees are going down. The data is more and more plentiful and so the need to figure out what to do with that data, how we incorporated in our analysis - the velocity of that is increasing; the way clients look at potentially investing versus the way an asset manager will look at it versus an asset owner. I think there's a lot of different topics to discuss there. One of the core ones that I think is near and dear to the fixed income world is, how can we continue to embed a quantitative element to fundamental research more and more? Clearly, we’re already doing that. Topics like behavioural finance have entered into them into the scope of thinking in the last number of years and we're doing a lot of that ourselves. But how do we continue to embed that? How do we utilise that data? How do we process it more efficiently? Clearly, we’ll always need to meet with management teams to try to get a sense of corporate governance, that clearly brings in an ESG theme to it. But how do we pick apart data that enables us to look at that in an even more efficient way?
Richard Edgar: Quant beginning to pervade investment at every level. And I suppose everyone will be at it - it's a quant arms race.
Martin Dropkin: Well, it is. And what does quant mean, right? So I'm not talking about macro investing here where you’re looking for changes in minutia about Treasury rates. I'm talking about how we can use big data, how we can use artificial intelligence to drive better decision making. I think we're at the early stages of that right now. We're already embedding nudges into our investment platform where perhaps we're enabling analysts and portfolio managers to look at a wider range of investments just by utilising the data better. I think the more we sort of embed that into the process the more we'll keep on and it will be a circular benefit to the whole process.
Richard Edgar: You mentioned fees. How will they change in how they're presented to clients?
Martin Dropkin: Yeah, I knew you'd bring that up. More efficient and more transparent. Well transparency is a given, I think. Clients are demanding it, asset owners are demanding it. We will have to expose our views a little bit more efficiently and a little bit more quickly. I think the fee structures are going to be compressed in a way that we will have to just make sure that our analyst teams and our portfolio management teams are just utilising the data the best they can.
Richard Edgar: Just taking that idea of transparency, Wen-Wen. How important do you think that will be to the investors of 10 years from now?
Wen-Wen Lindroth: I think it will be particularly important to the up and coming millennial generation. By 2029 they still won't form a majority of assets under management. According to studies it will be something like 16 per cent. But in terms of what's important to them transparency ranks very highly.
Richard Edgar: So a small group still but becoming more influential.
Wen-Wen Lindroth: Indeed. In fact, I think their cultural impact is probably going to be bigger than the actual assets under management.
Richard Edgar: Why do you say that?
Wen-Wen Lindroth: Because they are leading on culture. And technology is changing so quickly, changing the way that we relate to each other, even for the older people like us in this room. We are being led by younger people.
Richard Edgar: And Paras - how do you think, looking at the industry as a whole, how do you think it might change? Is it, as Wen-Wen’s saying, it’s being led by the louder voices of people with different views, or you've given lots of ideas on the economic side of how things are changing.
Paras Anand: Yes. So I have quite a different view on thinking about the medium term prospects for the industry and a big part of that is influenced by just remembering that there are very few things in the world of markets and investments that are structural and actually things do work in cycles. I actually think that there could be a very real prospect that we look at the industry in 10 years’ time and actually what we've done is rediscover the value of active investment and rediscover the value of fundamental analysis. Now, why do I say that?
Richard Edgar: Well, I was going to say, you would say that, wouldn't you?
Paras Anand: Well, absolutely, as Warren Buffett would say, never ask a barber if you need a haircut.
But I do feel that in the last 10 years and particularly in the last five years we've seen a boom in the types of strategies that really think not about a share or a security as being a part ownership of a business but really as being a price that correlates with other prices. So thinking about things like factor investing or smart beta or outcome orientating investing, they're not really interested in the share as a unit of the underlying company, they’re actually looking at shares and they're common behavioural characteristics. So in a sense they’re sort of one step abstracted from reality. And therefore, if you are, as I was saying earlier, in an environment where some of those fundamentals are going to change more profoundly over the next 10 years then you can’t live in that world of abstraction. Most innovation in finance actually ends up kind of turning in on itself after a period of time so I'm always wary about terms like ‘structural’, like ‘innovative’. I don't think disruption applies to our industry as a phrase.
Richard Edgar: That's quite a profound thought, that it will carry on as it has done. And Wen-Wen?
Wen-Wen Lindroth: I think the clients’ needs and what they're interested in and what they want to achieve is going to require more active management and more innovation, if I may use that word. And in terms of how we provide that service when we think about baby boomers and so many of them retiring and living longer, needing to save more, some of them needing to work longer. You know they have very specific needs that they need to have filled. And then when I think about the two probably largest up and coming groups - Millennials and Gen X - and then also women and the differences in how these groups want to invest their money - it's going to take more active management.
Richard Edgar: You've taken this to another area that I'd like to cover as well, which is diversity and inclusion. Because I know that that's something that you’re a champion of. The concept of diversity and inclusion is not new but the #MeToo movement seems to have given it very much more urgency. How do you think that is going to be reflected in asset management?
Wen-Wen Lindroth: I think that the #MeToo movement is going to have a very lasting impact on business in general because what it's done is pulled back the curtain on power imbalances in the workplace. And I see this as sort of being very much attached to the entire women's movement that erupted in 2017 with the women's marches etc. The way I would talk about this is not to just focus on gender diversity but to think about the quality of a management team and whether they are incorporating cognitive diversity. And it's not so much that I go in and take a look at the board or take a look at the management team and really analyse it for diversity, however, you can see that when a company is really able to navigate risks well it's because it's got the right combination of people making the decisions. There's been a lot of research done about the benefits of cognitive diversity, how it increases profit margins, return on equity, generally speaking you have lower leverage.
Paras Anand: Simply put Richard I think that for any company in any industry, any organisation, the environment is getting more complex. Success factors as we've talked about are getting less homogenous and hence I think you need in any industry much more of a multidisciplinary mindset and much more cognitive diversity in order to succeed. Also, I think that there's a deeper recognition that, given that you need to ensure that you’re attaining any advantage that you can, a lack of diversity means that you are not even mirroring the diversity of your customers. So you've got that responsibility as well. So I think this is going from something, which a bit like we talked about with other sustainability factors, these are things that have been talked about as kind of nice to have things, I think they're becoming absolutely fundamental.
Richard Edgar: So that's how it feels at the moment. Casting our minds forward a decade, what sort of conversation are we going to be having about then?
Martin Dropkin: I wanted to tie back to something that we've all talked about, which is transparency. The challenge for asset management is to continue to attract the best talent that we can whether that be approaching gender diversity, racial diversity, educational diversity, and transparency is only going to help there. And that has to start in schools, that has to start fairly early on. If we want to attract more females, more people from different backgrounds to this industry, then we will have to start to embrace it within the educational system. But I think the more we can open that up and show what asset management is then I think the more we'll be able to attract the right talent.
Richard Edgar: And Wen-Wen, if you think about your companies and the discussions that you’re having outside the company as well as within. What do you expect to be talking about in 10 years’ time?
Wen-Wen Lindroth: In fact I think if we succeed we won't be talking about it anymore. It will just be a given and we will be post-gender, post-race.
Richard Edgar: Is 10 years long enough to achieve that?
Wen-Wen Lindroth: I think that's a little optimistic but looking further out the goal is not to need to focus so much on this because it just is a given.
Richard Edgar: And briefly, Paras, what do you think? In 10 years’ time what sort of conversations?
Paras Anand: I think we'll be having a very different conversation in 10 years’ time. And I think the different conversation will be that less of our people might look to doing their entire career in one industry and that there may be a greater propensity for people to do a period of time in finance, a period of time in software, a period of time in media. And these sort of portfolio careers which we currently associate with much more senior people, in terms of their late stage of their career, they might start much earlier and that's maybe something as an organisation that will have to equip ourselves for.
Richard Edgar: It sounds like a very different world in some ways but some constants too. So hopefully the best of both awaits us in 2029. Paras, thank you very much indeed. Also to Marty and Wen-Wen and thank you for listening. Goodbye.
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