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Changing Perspectives In The Next Lustrum

Thursday 13 August, 2020 by Ankita Pathak

Despite the pandemic slowing things down, the world has actually leapt forward in the last 3 months. A mopping robot in a middle-class Indian household that felt like at least 10 years away, is now a reality. Global Handwash Day, an initiative first started in 2008 to educate people on the perks of handwashing, had been picking a slow pace, but has now reached the remotest places on the planet almost in the blink of an eye. Anecdotal evidence tells me that in suburban and rural areas, the spread of other communicable diseases such as typhoid and tuberculosis has reasonably slowed as people have generally became more hygiene conscious.

As far as ‘Digital India’ is concerned, Covid-19 did what even demonetisation couldn’t, with digital payments now at record high. Mobility might be stalling but advancements are gathering pace. As I sit to pen this, I am forced to think what the world ahead would look like. And I have a more profound realisation that I might be terribly wrong. Back in 2015, when I thought of life ahead, I certainly did not imagine myself living in pyjamas 24/7, shifting gears between work and household chores within a 750 square feet space. So, with that realisation and my biases intact, here are my conjectures for the world in the next lustrum.

1. Low interest rates will change our perspectives altogether. The global interest rates have headed southwards unidirectionally. While Japan, Denmark and Switzerland have negative interest rates, some 22 countries including the United States are now in ZIRP or the Zero Interest Rate Policy Regime. Twenty-three other counties have interest rates less than 1% and about 93 countries have interest rates below 4%. If we're to talk of the next quinquennial, the lower rates are here to stay. Most developed markets have already seen a significant cut, and the cycle has relatively more steam left for the emerging markets.

What does that mean for us?

a. For most of the developed world, household debt is above 50 percent of GDP. For most of the emerging markets, household debt is below 20% of GDP. With interest rates falling, emerging markets’ household leverage is likely to increase. This means that while for the developed world, monetary policy will lose its sheen, for the emerging markets it will now start to be increasingly effective.

For most of my life, I have heard of housing mortgage loans at ~10%. It effectively means that a 20-year USD £150 000 loan at 10% would mean a monthly Equated Monthly Instalment (EMI) of ~USD 1500. About 80% of the salaried class would consider that unaffordable and therefore prefers to pay a rent of USD 750 a month, in a suburb of Mumbai. With interest rates on home loans expected to be halved, this would mean the cost of EMI might equal the rents and overtime the housing ownership may pick up. In a nutshell, EMIs are yet to see a rise in household debt.

b. The way we look at Equity will be different, with most equity valuations being revised on the upside. With cost of capital reducing, the discounted value of future cash flows will look higher which means the equity valuation band will shift higher. Clearly, the value of future cash flows might fall as growth stagnates thereby negating the effect fall in cost of capital. However, there will be sweet spot sectors with a potential of outperforming the systemic Nominal GDP while reaping the advantages of lower cost of capital.

c. Overall, our investments will yield less but also our interest payments will fall.

2. New age businesses will take on the world. The next generation of businesses is likely to look very different: a) with cost of capital falling, business acumen will play a higher role; b) the new age businesses will be digital, with intangible assets and no clear line between capex and opex, and that will put all existing models to question; c) it will be a world where people will prefer outsourcing over doing everything from scratch. End-to-end solutions businesses will pick momentum.

The key point here is that the offerings, models and structures of business will all see a 180 degree change. The need for innovation will be more resilient than ever.

"As Nobel laureates Abhijeet Banerjee and Esther Duflo argue in their book, “Good Economics for Hard Times”, migration doesn’t necessarily adversely affect the host country nor does trade guarantee definite gains."

3. Dollar may lose its charm but is unlikely to be knocked down. There is a floating narrative that we are approaching an end of long-term debt cycle which is marked by overthrowing the existing fiat currency, in our case, the dollar. My sense is that it is still a little far fetched in the near term. I do see the dollar depreciating in the near term, part of which has already played out with DXY cracking below 93. Federal quantitative easing, US losing its yield advantage over G4, and a cyclical completion of the dollar’s strength are the driving factors for dollar to weaken from hereon. Again, this will make emerging markets outperform the US.

4. Globalisation is here to stay but will not be a blind rush. This is probably my wishful thinking but I do not see globalisation coming to an end. My sense is that after an initial dip, migration and trade will pick pace. As Nobel laureates Abhijeet Banerjee and Eshter Duflo argue in their book, “Good Economics for Hard Times”, migration doesn’t necessarily adversely affect the host country nor does trade guarantee definite gains.

Sooner or later, the economies will realise this and settle in a new equilibrium where the sentiment for protectionism is negative but opening up becomes a more well thought of decision, rather than a mad rush both at an individual and at a country level.

"As the world changes, there will be a constant need to upskill ourselves. While machines may take care of the functionality, humans will work on vitality."

5. You will learn a lot of new things. EdTech platforms have seen 10 times the number of registrations in the last quarter compared to normal times. As the world changes, there will be a constant need to upskill ourselves. While machines may take care of the functionality, humans will work on vitality. As David Priestley rightly puts in his book Key Persons Of Influence, “Vitality yields creativity and innovation. It yields leadership. It yields boldness and robustness under pressure. It yields insights and breakthroughs. Software and machinery can’t do that, software and machinery can only do the stuff we call work”. As humans tread on this more advanced path, we are bound to learn more.

About the author

Ankita Pathak

Ankita Pathak, was a Commonwealth Scholar when she came to Warwick to study for the MSc in Economics which she completed in 2016.

In her blog for the Times of India she is described as a macro and markets fanatic, looking to understand global and historic trends while also sharing her knowledge with others.

To read more of her articles please see her blog for the Times of India

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You can reach Ankita on Twitter: @ankitapathak_