The collaborative economy, which has its foundations in the possibilities offered by technology and the Internet, is fashionable. But for Paul Brain, head of fixed income in Newton (BNY Mellon), before praising this trend it is necessary to evaluate and determine the potential impact it has on inflation.
Now that many economies are raising the minimum wage and trying to protect their domestic industries by imposing tariffs on product imports, Brain believes that wage pressures should be increasing and reflected in headline inflation. However, wage inflation remains relatively modest. "In addition, most of the major economies have rather low levels of unemployment. Under normal circumstances, this would cause wages to increase, something that, however, has practically not happened, "adds the expert.
The main driver of the collaborative economy has been the proliferation of smartphones, which in turn has generated greater efficiencies, he explains. This is one of the factors that has slowed the growth of wages in recent years: "The automation that underlies the collaborative economy does not eliminate jobs but, in many cases, facilitates that they can be done more quickly and easily. In London, the taxi sector was protected and taxi drivers had to pass an exam (known as "the Knowledge of London") to demonstrate their knowledge of the London street before obtaining their license. Passing this exam used to take between two and four years and it was an important investment for any taxi driver. "
In his opinion, Uber is a good example. Since their arrival, the number of available cars has increased and prices have dropped. "Basically, the application has digitized the knowledge that previously required so much study time and energy," he says.
Evolution of fixed income
As Brain points out, the market's opinion is that fixed income faces major changes - the inclusion of inflation and increase in the yields- that will make it more difficult to earn money in the asset class, something that does not have to be fulfilled if the Inflation continues to remain at low levels. "Be that as it may, we believe that there are ways to deal with this situation if a sufficiently global approach is adopted, it is diversified in markets where interest rates are not rising and short positions are adopted in markets in which they are rising. "He argues.
In this sense, it is the approach that is following in the Global Dynamic Bond strategy. The brain relies on several markets to take advantage of its 'asset refuge' properties and others that offer more risk, such as high yield debt and emerging market debt: "Even in an inflationary environment we can find companies that are doing well and countries that behave differently. "
Will inflation return?
Although the central banks are adopting a somewhat more aggressive stance, the process has been so announced that Brain is not worried about the impact it may have on government bond issues. "The gradual withdrawal of quantitative expansion is not as negative for government debt as many people think, because markets tend to discount it. In my opinion, risk assets are more vulnerable to a sudden rise in volatility, "he says.
In the absence of this increase in volatility in equities and risk markets, the expert places treasury yields in the range of 3.1% and 3.4%. As he explains, the reason why they are not yet at those levels is in the turbulence of February but I think they will end up reaching them. The environment points to higher returns, which is why we have now become short in the treasury market.
For Brain, the Moravec paradox could be another factor explaining the short-term rise in inflation in the long term. "One of the most curious aspects of automation is that machines find it easy to perform the most difficult tasks for humans. However, machines are difficult tasks that humans find simpler, such as serving food or drinks. The professional services sector has been the main employer in the last two decades and that is where we could see the most important changes and the biggest falls in wages. The pressure will not disappear, so it is inevitable that we ask ourselves if inflation will one day return to its trend, "he says.
SUBMITTED BY Funds Society