Macroeconomic volatility is set to rise and leverage is likely to start a long decline to lower levels, according to the 2008 issue of the Barclays Equity Gilt study. Tim Bond, head of asset allocation at Barclays Capital, says the force behind these developments is rising global prosperity, which is putting the supply system for natural resources under strain.
This strain is coming through increased absolute and relative scarcity and the negative impact of pollution and global warming. “The net result is an increase in structural upward pressures on inflation and a worsening trade-off between resource inflation and growth,” says Bond.
To prevent an inflationary spiral, Bond says central banks will have to use tougher policies than over the past two decades. “In particular, [they] will be more constrained in dealing with the aftermath of speculative bubbles and phases of excess leverage. Macroeconomic volatility is therefore likely to rise. In time, this development will break the cycle under which the seeds of each new speculative bubble germinate in the ashes of the previous bubble.”
Bond says that leverage, notably among households in developed economies, is likely to “start a long drift lower, mirroring the decline in residential investment as a share of overall investment”.
The Barclays Capital study reveals that at 3.1% a year, equities delivered a lower real investment return than gilts (3.3%) and index-linked bonds (3.7%) between 1997 and 2007. This followed a real investment return of just 1% by equities in 2007 compared with 1.2% by gilts and 1.4% by index linked bonds. The 1997-2007 period generated the lowest equity returns since 1967-77, which included the quadrupling of oil prices in 1973 and the initial stage of stagflation.
The credit crunch last year left the 15-year corporate bond index almost 6% lower in 2007 following a 4.5% fall in 2006.