Global macro: A banquet of consequences | Insight Investment

The growing risks facing the global financial system

Abdallah Nauphal, Insight’s CEO, examines the growing risks of a forced deleveraging event as economic growth becomes increasingly constrained by demographics, debt saturation and deglobalization. With central banks reaching the limits of monetary and fiscal policies, investors need to prepare themselves to be more resilient to face the potential challenges ahead.

• The economic shocks we have faced shouldn’t have been such a surprise, they were the consequence of developments that have been building for decades
• We are approaching an economic tipping point, with growth requiring ever-increasing interventions to counterbalance unfavorable demographics, deglobalization and debt saturation
• A disorderly deleveraging event is more likely as higher interest rates exert pressure on the buffers within the system – a ‘Minsky moment’ may shift the economic system to a new equilibrium
• Key to this will be inflation:
  • If inflation abates, this short-term respite will allow central banks to sustain the current equilibrium for the short term
  • If inflation persists, a more severe threat to economic prosperity would be likely to force central banks to move inflation targets higher to protect financial stability
• Corporate profits are vulnerable; although funding costs may only increase gradually, the factors that drove corporate profits higher over recent decades are all shifting into reverse
• We need to prepare for the risks ahead and it is hard to believe we don’t face a period of economic pain before a real long-term solution can be found

Click to read the full whitepaper below