Partner Insight: Changing demographics, globalisation and technology are just some of the factors pushing capital from Western economies to Eastern economies over the past thirty years. Are multi-asset portfolios at risk of being left behind amid such historic regime shifts?
For Parit Jakhria, Director of Long-term Investment Strategy at Prudential Portfolio Management Group (PPMG), one of the biggest structural shifts being seen today is the ongoing shift of the world's economic centre, which in less than three decades will have transferred from the west of the globe to the east. This has been seen with the rise of China and Asia as a whole, which continue to grow in terms of their economic and investment influence.
"Historically, the economic centre of gravity was broadly in line with the size of the global population and early civilisations grew around the banks of rivers like the Nile, Euphrates, Indus and Yangtse Kiang. Until 1500AD, the agrarian economy and trade in agricultural goods was primarily within Asian and African civilisations. At that point, Western Europe, North America and Australasia accounted for less than 20% of the world's economic output," explains Jakhria.
This however changed rapidly with the arrival of the Renaissance era, and Western Europe emerged as a hub of scientific evolution (see graphic over). Both Europe and the Americas came to dominate the global landscape from the early 1800s onwards, using an accumulation of knowledge and ideas alongside its imperial military strength to maintain its position as the economic centre for some time.
The two World Wars reversed this trend in the mid-20th century. European empires suffered at the same time as countries such as Japan, China and other ‘tiger' economies experienced growth. Eastern economies were the main beneficiary of the globalisation of trade and the free flow of capital, labour, goods and services. Even today, the overall narrative remains focused on the economic importance of emerging economies in Asia and Africa in investment markets (see graphic above).
The macroeconomic implications of this shift are likely to alter many of the fundamental pillars of our world economy, according to Jakhria, and impact geographical asset allocation significantly.
For example, major OECD countries have followed a common template for the interaction between monetary and fiscal policy ever since the 1980s and 1990s. Over the years it has become accepted wisdom that an independent central bank with a primary mandate to keep inflation in the low single digits is best for the overall health of the economy.
However, the rise of China could see the Chinese model become the norm as an alternative; where the primary goal of monetary policy is political and economic stability, rather than price stability.
Jakhria explains: "If the Chinese economy was to avoid any major blow-ups in the immediate future, it would be a successful example of limiting the independence of central banks and running a centrally managed economy through monetary, fiscal and regulatory oversight."
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