Speaking at Workplace Pensions Live 2016, Andrew Sentance, former external member of the MPC of the Bank of England identifies three key themes in the global economy
Trustees need to accept that we are entering a “new normal”, characterised by slower growth and persistently low interest rates, according to Andrew Sentance.
Speaking to a packed room of trustees and scheme managers, the former external member of the MPC of the Bank of England, said pension schemes would have to be more selective about the markets in which they invested in future.
Sentance outlined three key issues facing investors in 2016.
The first is that the economy has not bounced back as quickly as people had thought it might. And while there is growth in the West, the rate of growth globally is still far slower than it was pre-crisis. “We’re not where we thought we were before the financial crisis; growth is weaker and interest rates are lower,” he said.
The second is that interest rates continue to remain far lower than expected. And while he expects interest rates to rise, he argues that this will be gradual.
The third key issue is the growing economic disparity between markets. Sentance told the audience that divergence should be the economic watchword, pointing to patchy growth across emerging markets as well as the different experiences between the north and south of Europe, as examples of how varying the post-crisis economic experience has been.
He said: “The West since the financial crisis has been a bit better but emerging markets are more mixed. Some are doing really well, but others, (e.g. Brazil) are really struggling…. If I was going to sum up in one world the Eurozone economy and the economic forecast for the next two to three years it would be divergence.”
This triple threat of slow growth, poor interest rates and divergence means that trustees need to look beyond the macro movements in the economy to exploit patches of opportunity on both a sector and country basis.
Sentance said: “If you’re thinking from a pension fund perspective where am I going to invest, you need to be much more selective and work out where the genuine growth opportunities lie.”
He said growth could be found in areas such as technology.
Overall, though, Sentance is positive about the outlook for the UK, reminding the audience that 2% growth was not all that different from how the UK fared before the boom of the early 2000s.
However, he cautioned that a possible Brexit is the cloud on the horizon. He argued that were the UK to leave the EU it would negatively affect UK GDP for many years to come. Fortunately, however, he remains confident that the UK will vote to remain.
He concluded: “[Brexit] has been a really politically driven event. The government hasn’t decided to have a referendum because there has been a real clamour for the finance and business community.
“I don’t expect it to happen but it’s something you need to think about as it’s a major business risk to the business of pension funds.”