An ongoing shift in the balance of economic power from the west to the east has been catalysed by Covid-19, with huge implications for global investors, says Bob Prince, co-chief investment officer of investment management firm Bridgewater Associates.

Speaking at the Investment Magazine Fiduciary Investors Symposium on Wednesday, Prince said an Asia Bloc of seven of the largest economies in Asia had greater levels of trade among them than trade between European countries, a comparable level of output to the US plus Europe, and a contribution to global growth that is 2.5 times that of the US and Europe.

“So what’s happening is a shift in the economic balance of power from the west to the east,” Prince said. “From an investment standpoint this has huge implications, more so over next decade when you think about changes in reserve currency status, what’s priced into the forward markets and so forth.”

Prince outlined “five big things that won’t change” after Covid-19, which he said will have a bigger impact than anything that does change. Watched a brief excerpt from the interview with Prince below.

 

First, the impact of the virus is the number one driver of economic, market and policy outcomes, and the uncertainty associated with it will be around for at least another year even with the development of a vaccine.

“The virus is an interesting thing when you try to translate it into how it affects economies and markets,” Prince said.

“And what you see is that it’s not death rates, it’s not hospitalisations, it’s not cases. Basically at the end of the day the only think that matters is whether people are behaving normally or not behaving normally. And one of the better metrics of that is the mobility data. Mobility is really just a reflection of whether people are living a normal life, and the mobility data has been highly correlated with levels of spending.”

Second, it will be an ‘MP3’ world referring to a third paradigm in monetary policy. The first was interest rate-driven monetary policy, which was replaced by the second paradigm of QE-driven monetary policy after the global financial crisis. With zero interest rates and reduced power of central banks, the third paradigm will see central authorities, not central banks, pulling fiscal policy levers, funding spending by printing more money.

“Governments can actually direct that money where it needs to go, so it has tremendous potential to  be very effective. But it also has tremendous potential to be very ineffective. Ineffective by either perhaps directing in the wrong places or by doing too much or not doing enough. And it’s an untried lever.”

Decision makers also won’t be central bankers who have been trained all their lives in managing economies, Prince said, leading to a more uncertain picture.

Third, the world will be awash in liquidity, resulting from policymakers “showering people with money” and a rise in savings rates. And fourth, this liquidity will wash into certain “storeholds of wealth”, but not others.

“So what’s driving these massive divergences between assets and economies is that pressure of liquidity that goes into some, but the adverse economic impacts that impact others,” Prince said. “And that will still be with us for some period of time.”

Fifth, the difference in how the virus was handled will play into long trends between the eastern and western hemispheres.

“Whereas in Asia the virus was handled through discipline and policy, in the US and Europe it was handled basically by showering people with money, but that money also represents an accumulation of debt. So there has been a step change in the relative secular trends between east and west that I think will be particularly relevant over the next decade.”

You can see the full interview on the Fiduciary Investors Symposium digital hub.

Ben Hurley is a journalist and editor with more than a decade of experience in the industry. He has written for The Australian Financial Review, Business Review Weekly, The Guardian and a range of specialised and industry publications.
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