The Merrill Perspectives Podcast

Episode 12:

"Welcome to the 2020s"

 

With

 

Candace Browning

Head of BofA Merrill Lynch Global Research

Chris Hyzy, Chief Investment Officer,

Merrill and Bank of America Private Bank

Michael Hartnett, Chief Investment Strategist

BofA Merrill Lynch Global Research

 

“REAL VOICES” MONTAGE

Reporter: Picture the world a decade from now. What do you think the world will look like? 

Voice 1: I do think cars will be driving themselves.

Voice 3: I could see a human actually going on Mars in the next decade.

Voice 4: I think that paper-based currency will go away.

Voice 5: Leaning more into quantum mechanics and quantum physics.

Voice 6: Virtual reality may be taking over travel.

 

CANDACE: Those are the voices of people talking about what they think the coming decade could bring. And in many ways their thoughts reflect just how much change is happening around the world right now. And the rapid pace of change we’re seeing today is likely to continue and accelerate into the 2020s.

[Theme music]

You’re listening to the Merrill Perspectives podcast. I’m Candace Browning, Head of BofA Merrill Lynch Global Research.

And here with me today to take a trip into the future is Michael Hartnett, Chief Investment Strategist for BofA Merrill Lynch Global Research.

 

MICHAEL: Good to be with you Candace.

CANDACE: And Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank.

CHRIS: Hello Candace.

CANDACE: It seems hard to believe, but we’ve actually closed out the second decade of the 21st century and obviously a lot has happened in these last 10 years. The world recovered from the largest economic downturn since World War II, an unprecedented response from central banks, with the steady decline in global interest rates, now at their lowest level in 5,000 years.  (Source: Transforming World: The 2020s,” BofA Merrill Lynch Global Research, Nov. 11, 2019, page 5).

So, Michael, let’s start with you. What are the most important themes that you think have shaped the past 10 years and how are they going to shape the next decade?

 

MICHAEL: You touched on certainly the biggest one for the financial markets, which is the role of the central banks. I don’t think you’ve ever seen a concentrated period of such intense intervention in financial markets by central banks. You know, at the beginning of the decade, there wasn’t $1 of negatively yielding debt in the world. There’s now $15 trillion of negatively yielding debt.

I think technology, is the second big story of the last 10 years. I mean, you can see that within the market, we can see it walking down the streets and you know, piles of cardboard boxes being delivered. And, of course, those two things, the low interest rates and the technological disruption, have caused really, the third big trend, which is the polarization trend.

Within the financial markets, some stuff is valued extraordinarily highly, and some stuff isn’t valued at all. The U.S. tech companies today are worth significantly more than every single company in Europe.

And, of course, that mirrors what we’re seeing in society as well, where, if you have capital, you’ve done very well. But if you’re reliant on labor, you’ve done less well, hence the inequality and the politics of the next 10 years.

 

CANDACE: What do you think are some of the new trends and perhaps surprising trends that you’re going to see in the next 10 years? 

 

MICHAEL: I think that you are going to see greater government intervention in the economy.  That could be in good ways. It could be infrastructure spending. It could be in less good ways by regulation. But certainly, I think you’re going to see a much more activist government, going forward in the next 10 years. 

 

CHRIS: Yeah, I would add to it some of the bigger themes that are just beginning to develop right now that would extend themselves, one of which is we’ve had an absence of productivity. There’s a lot of theories around it. I think the greatest theory is perhaps it’s mismeasured today.  

The other thing to think about is that the innovation cycle, Candace, the next wave could potentially be substantially related to infrastructure, whether it’s smart cities, new dams, the ability to produce power in different ways.

 

MICHAEL: And in the environment too.

 

CHRIS: And in the environment, which we’re all witnessing right now with California and everything else that’s going on. So from that perspective, it’s the grid. It’s the next wave of 5G, and then I think geopolitically, it’s the disruption of the global supply chain that’s unfolding. Ten years from now it’s likely to be a lot clearer, probably dominated by the U.S. and dominated by China.

 

CANDACE: I want to just delve into this a little more. So, I know Michael, you’ve used this word a lot, and that word is “peak,” and you’ve talked about things peaking. Peak globalization, peak oil, peak youth. If all of these things have peaked, are they now going down?

 

MICHAEL: No, I don’t think that’s the case. I mean, what you’ve seen is great leadership from, you know, certain areas of the market. Things like technology. You can look at, you know, the globalization story. But it’s not to say that it’s like a mountain—you go all the way to the top and all the way back down again. I mean things will come in to replace them. So you’ve got to think about what’s the alternative, not just what’s the downside.

 

CANDACE: So, if it’s peak globalization, then what you really need to figure out is what’s the localization that happens after the globalization.

 

MICHAEL: Yeah. Or what we did with peak oil. I mean, peak oil was a story early on in the 2010s and the answer was shale gas and now alternative energy. People are very good at finding solutions. I think.

 

CANDACE: So, it’s about figuring out what’s next.

 

MICHAEL: Yes. I mean, what’s the next “next” alternative? Think about the 2010s, arguably a peak climate change fear. Whereas, you know, the 2020s are going to be climate change solutions. You’re just going to be sorting it out and now that you have the political will and low interest rates, so it’s easy to finance. I mean, that’s what’s going to happen

 

CANDACE: That’s wonderfully optimistic.

 

MICHAEL: You know, I can do that. (Laughter)

 

CANDACE: So let’s talk a little bit about economic growth, interest rates, and innovation. In terms of economic growth, the United States is obviously still in the longest economic expansion in its history. It’s 10 years plus counting. Maybe we’ll become Australia, which I think is about 40 years, if I’m not mistaken.

 

MICHAEL: Yeah, yeah that’s right.

 

CANDACE: But there’s a lot of people who are wondering how much longer can this last. So, Michael, what are the signs of a slowdown that you’re looking for?

 

MICHAEL: You know, we’ve been climbing this wall of worry for a long, long time. In the U.S. if you think about what an economy is, it’s four sectors. It’s the consumer, the corporations, the government and the financial sector, which, today runs you know, at least the banking sector, an impeccable balance sheet, there’s absolutely no doubt. Compared to 10, 15 years ago: impeccable.

Same for the household sector. So the household sector and the financial sector are not going to be the causes of the recession or the downturn. What is going to be the cause is going to be either the corporate sector or the government sector.

The government sector is the government. So it can force the central bank to fund it. We’re seeing that in Japan right now. So, it’s really the corporate sector you’ve got to keep your eye on.

So long as the Fed can keep the corporate sector liquid, prevent corporate cost of financing from rising too quickly, both here and also in Europe, the people looking for a recession are going to continue to be somewhat disappointed, I think. And a lot of that will depend on inflation. You know, if inflation goes up, then you get a recession.  

 

CHRIS: Given what you laid out, is it possible that we have these little mini-recessions that hit like fourth quarter where it’s not a textbook recession, but it feels like one, and then we have mini-expansion, minirecession, mini-expansion driven by low levels of inflation. But to your point about central banks understanding that the corporate sector we need to keep, not just alive, but somewhat healthy?

 

MICHAEL: Right. This is an unusually long expansion, but at some point, it will come to an end. But we’ve all been humbled by what the markets and the economy’s done by the past 10 years. I mean, you have to keep an open mind. And again, the inflation is crucial. You don’t get inflation, you don’t get a recession. It’s kinda that simple. 

CHRIS: That is something obviously that we’ll all be watching.  

CANDACE:  Chris, I know one of the areas of the economy you’ve been particularly focused on is housing. And there are around 75 to 80 million Millennials who actually could represent a very large wave of first time home buyers. So do you think that housing will be a key component and keeping U.S. economic growth going? 

CHRIS: Yes. Yes. It’s a big theme. It’s we like to call it the housing renaissance is back on. It might be similar to the mid-nineties wave, when housing took off and became a larger share of the U.S. economy. And then of course you get your collateral effects about once you own a home, how much you have to buy to outfit the home, et cetera. You’ve got this sheer number of people called the Millennials that are now predominantly in their thirties. So they’re in the sweet spot. But then you’ve got the Gen Z coming behind them. 

I would worry a lot more if the total population set of Gen Z was lower than Millennials, but it’s actually higher. So it’s early days. It’s perhaps a little bullish to suggest that a massively new housing renaissance is coming. It’s probably slower, but the sheer size of it should be greater.

 

CANDACE: Keeping on the subject of people. You know, one amazing statistic I thought is that the 2020s, will end with 1 billion more people on the planet, and yet the number of grandparents in the world will soon outnumber the number of children. (Source: United Nations, 2018.) And so it’s a function of people obviously, you know, having fewer children, but it’s also a function of longer lifespans.

MICHAEL: That’s right.

 

CANDACE: So, what does all that mean?

 

MICHAEL: Well, I that’s a big story, the theme of immortality and a desire to live as long as you can. And I think you’re getting to that stage of medicine of biotechnology with genomics. And CRISPR and all of this sort of stuff, you will be able to live longer. (Source: United Nations, 2018.) Whether you truly will enjoy living longer remains to be seen.  

And that’s huge I mean if you’re 50 years old and you’re going to keep working till 70, 75 and live until 95, you’ve got to keep saving, you can’t immediately start spending, do you know what I mean?  

And so I think that that what you see in the markets, the pension funds, the desire, for income, for yields, what we’re seeing in savings, not just here. I mean, this is a European story. It’s an Asian story as well. And ultimately, you know, the conclusion you get to is that it is something that is going to lead to downward pressure, not upward pressure on interest rates. Believe it or not. 

CANDACE: So staying on the topic of Millennials a little bit. We know that people in that age group are very interested in applying their values, the things that they think are important, to the way they invest. And that’s commonly referred to as impact investing, or ESG investing, which uses environmental, social and governance metrics to evaluate investments.

So how do you think that will reshape markets and how financial assets are valued?

 

CHRIS: Yeah, I think this is the one area Candace that we can say we’re not even close to peak disruption, Michael, which is the impact end of things. And you know, it’s a subject that continues to grow and evolve.  

I think the most important part about impact is what you talked about at the outside of the question is the values and what are people investing for? What are they walking through life about? What do they believe in? And how does that filter, ultimately, into how do you want to spend your time, energy, capital, and how do you want to invest in the future?  

I think you’re going to see companies go down the spectrum of not calling this a subject anymore, but within the next 10 years, the next few years, it’s simply a great way to do business. And that runs the full gamut of what that is. And then investors are going to have to decide at the company level, at the investment level, who do they believe represents their value system.

 

CANDACE: So what’s going to drive the global economy in the 2020s? Michael, where do interest rates and corporate earnings fit into the equation, and what else are you looking for? 

MICHAEL: Well, I think there’s a simple answer to that. I mean in the 2010s, there’s no doubt that the U.S. drove the global economy, and you go into the 2020s requiring the rest of the world to do a better job of driving the global economy.

If they can, interest rates will go up. If they can’t, interest rates will go down. And a lot of, whether they can or not will depend on the decisions they make internally.  

So, an American investor right now is very much fixated in their portfolio on American investments, and they need to be persuaded that there’s a story in the rest of the world. For example, a story could be Germany, which has a tremendous amount of savings suddenly deciding that they’re going to spend some of those savings to upgrade their infrastructure or improve the environment, whatever they choose to do with their money. 

But that would be a story whereby you could see investors say, you know what? There is a growth story outside of the U.S. it’s not simply just the U.S. consumer delivering all the growth.  

I think the other story that didn’t work in investment terms in the 2010s but nonetheless I think is still a huge story which is the emerging market consumer. The emerging market consumer has emerged further. There are more of them. They are wealthier. They’re having a very big effect on goods and services and all sorts of things, capital flows and stuff. But I think the recognition of that is going to be much, much greater going forward and they’re going to have a very big impact on growth, I think in the next 10 years.

 

CANDACE: So, Chris, let’s talk a little bit about technology. I know it’s, it’s a topic that you’re passionate about. It’s already impacted every area of the economy. But what are the next big changes? I mean, there’s quantum computing, which could be a huge game changer. You know, there’s the rise of things like smart cities, clean fuels, medical advances, what are you really looking at for the 2020s? 

CHRIS: It’s technology across all sectors. It’s within the industrial space. It’s automation, it’s the use of robotics. It’s not the displacement of jobs in robotics, but it’s how to create greater productivity and fill the gaps of labor that we simply don’t have. In the health care side, it’s an expansion of personalized medicine, but I also think it’s a digitalization within the health-care cost curve. You know, how do you digitalize imaging through 5G and other advances. 

Smart cities, we’ve talked a lot about what does that really mean? Well, it’s traffic congestion. How do you get away from that? How do you use non-hydrocarbon ways of transportation through the use of either electric vehicles or other modes of cleaner fuel?  

And then last but not least we talk a lot about infrastructure, the entire grid system. I think it comes down to how do you store power? How are you able to store the need for power, the amount of AI, artificial intelligence, machine learning; and how do you just store that in the cloud versus the next evolution of the cloud.  

So, the next big wave in technology’s going to all be about how do you store information, ultimately access it, and the power needed to create that.

 

CANDACE: So are all these challenges and changes that we’re facing in the 2020s good or bad? In other words, should I be optimistic or pessimistic? 

 

MICHAEL: Well, I think you should always be optimistic and I think human beings are always optimistic. I mean we just, we learn, we sort of evolve. We find solutions to things.  

I mean, I think the demographics, is an interesting and new topic. I mean, you look at somewhere like Japan, which is ahead of us in terms of the demographics, and in Japan, you see amazing sort of technological advances to deal with aging, to deal with health care, you know, to replace people in the working population because there’s just less of them. 

The other reason to be optimistic is there’s just so much pessimism around. We’ll end up older in the next 10 years, but I think the environment will be cleaner. I think people are going to feel much more empowered, you know, I mean we’re clearly see seeing that through, you know, social media. So I think that things will get better rather than get worse.  

 

CHRIS: Yeah, I would agree. And I think the credit crisis really, because it hit across every cohort that was out there in one way or the other, really taught people to think about what’s next.  

But generally speaking, as Michael said, I think everybody has this can-do attitude that we could plow through the next whatever. And while all that’s happening and we’re waiting for that next exogenous shock that we all fear, whether it’s geopolitical, militarily, a tragedy, or just a downright hard recession, all these little positive shocks develop, and they surprise us.  

 

MICHAEL: I mean, you’ve got to see more equality. 

 

CHRIS: Yes. 

 

MICHAEL: Again, you go back to that theme of sort of polarization. There’s no doubt that if you look at, you know, again society and politics, you’re moving to a situation where people want to see greater equality. I think that’s terrifically important that whether it’s demographics, because there’s Millennials or Gen X, whether it’s sort of the working class versus the middle or the rich people. I mean you need to see people feel less left behind.  And if you think about what we’re living through, I describe it as a sort of angry prosperity.

 

CHRIS: Mmm hmm

 

MICHAEL: You know, there’s a lot of prosperity, but at the same time there seems to be a lot of anger. And so you do worry a little bit, that if suddenly, there was an exogenous event, as Chris was talking about, where that anger would go, and that is a worry.

So, but I think the flip side of that is the policy makers know that, which is why they’re so desperate to prevent a recession. And why I think, increasingly, there are these calls we got to use fiscal policy much more actively to lift everyone up, not just the people that own stocks and bonds.

 

CANDACE: So what you’re really talking about is financial lives. What do you think life will be like at the end of the 2020s, both in terms of regular life, but also your financial life? I mean, are we going to be working differently? Are we going to be spending our leisure time differently?  

What are we going to sit around the kitchen table and talk to our families about? Or will we be sitting around the kitchen table?  

 

CHRIS: There are unending ideas that we can go with in terms of what we would be doing when we get up in the morning and how do we go to work, etc. I would envision a situation where holograms could be sent on telepresence, to less commuting time—because the commuting time continues to go up regardless of whether you’re in a metropolitan city or outside in the suburbs. 

But at the end of the day, the greatest possible revolution is in the education arena. That should be the one area that could help with the inequality and that can only be put, turned upside down in a positive way through the use of the internet in a more impactful way. 

 

MICHAEL: Well, I think, you know, over the next 10 years,  

 

CANDACE: Well, you’ll get old over the next 10 years, right?

 

MICHAEL: Well, I think that’s the guarantee.  I do think that by hook or by crook, you’ll end up with an older society, a more equal society. And I think that it would be surprising if you didn’t end up with a cleaner environment. You ask most 15- to 25-year-olds, what do they care about the most? And, you know, certainly climate change is a big one.  

So, you know, I think there are some obvious destinations that I think society wants to get to. Whether they’ll get there in an easy way or a difficult way, it’s sort of up to society. But I think nonetheless, I think where we’re going I think is pretty clear-cut.  

We’re getting older, getting cleaner, and becoming more equal, I think. 

 

CANDACE: So if I have to be saving for my very long retirement, how should I think about investing? Should I be changing sectors to where there’s going to be more innovation? For example, health care? Should I be looking at growth stocks versus value stocks? How should I be thinking about my asset allocation?

 

MICHAEL:  If you’re moving from inequality to equality, or a lot of polarization to less polarization, it seems a bit fuddy-duddy in 2019 to be talking about it, but it’s diversification. You’ve got to be very, very diversified.

But the next 10 years, I think it’s unquestionably you’ve got to have a little less growth, a little bit more value, a little less bonds, a little bit more commodities, a little less U.S., a little bit more the rest of the world.  You just can’t have all your eggs in one basket.

 

CANDACE: And you have to be invested. You can’t be out of the market.

 

MICHAEL: Without question. Yeah, absolutely.

 

CHRIS: Yeah. I’ll pick or pick up where Michael left off. Portfolio construction often is misunderstood. Most people stop at asset allocation. The next few levels of asset allocation is not just tax efficiency or other avenues, but it’s about rebalancing.

You have to take the emotion out of it, to help you think about rebalancing a portfolio around a stated allocation profile and whatever your time horizon is. So be disciplined, be diversified, invest across assets, have a rebalancing frequency that works for you, and create some goals and a plan to achieve those goals. And that’s not in or out of the market. Just like you said Candace.

 

CANDACE: So Chris and Michael, given everything we’ve talked about and all the ground we’ve covered, do you have any final thoughts about the next decade? 

 

MICHAEL:  We’ve had just a fantastic decade in terms of asset returns. But whether it is the environment, geopolitics or whether it’s, you know, there’s so much that people are worried about and you just wonder if at some point, it isn’t as bad as people think it’s going to be. And that would be sort of the most hopeful thing I could say about the next decade is that you’re starting it with so much anxiety that it actually may not be as bad as many people think.  

 

CHRIS: Yeah, I would agree with that. That I think anxiety, if it were trading on a on the stock market right now, it’d be the highest multiple that’s out there. Interest rates probably have a natural ceiling to them, although rising a little bit from 5,000-year lows.  

So put it all in perspective: I think you got to stay invested, be optimistic, rebalance when it gives you the time to do it, and watch this incredible culture take over. 

 

CANDACE: Well, Chris and Michael, thank you very much for this fascinating look into the 2020s.

You’ve been listening to Merrill Perspectives. I’m Candace Browning, Head of BofA Merrill Lynch Global Research. My cohosts have been Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank and Michael Hartnett, Chief Investment Strategist for BofA Merrill Lynch Global Research.

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This podcast was published on November 20, 2019.

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