Speaking to InvestorDaily, Magellan Asset Management chief executive Hamish Douglass said the long-term equilibrium ‘risk-free rate’ is higher than is currently being reflected in equity markets.
However, Magellan has also revised downward its view on the risk-free rate from between 4.5 and 5 per cent, Mr Douglass said.
“[We used to think the risk-free rate was] close to nominal GDP growth in the US in the long term,” he said.
“We’ve now decreased our view of where that long-term equilibrium risk-free rate will sit and get priced by equity markets. That means the discount on equities goes down, which means some equities go up in value.”
Bond markets are currently “distorted” by central bank policy, and the equilibrium risk-free rate will only be revealed when, and if, organisations like the European Central Bank stop buying bonds, Mr Douglass said.
“The reason the risk-free rate has come down over the long term is that we think the world, and particularly US growth, is going to be lower through the next 20-year cycle than it was over the previous 20-year cycle,” he said.
Magellan’s projected slowdown in US growth over the next two decades stems from three considerations.
First, US consumers are unlikely to ‘re-gear’ themselves over the next 20-year cycle, Mr Douglass said.
Second, the demographics of an ageing population suggest there will be fewer households formed and, as a result, lower spending to “fill up” those homes with goods.
Finally, Mr Douglass pointed to the “technology revolution” that will take place over the next 20 years and what it will do to inflation around the world.
It could mean cheaper goods through innovations like 3D printing, and lower wages for middle-class people, he said.
Globalisation did not have a massive deflationary effect as manufacturing capacity shifted to China during the past 20 years, Mr Douglass said – but the coming technology revolution could be different.
“[As globalisation proceeded] middle-class jobs didn’t get displaced; blue-collar jobs got displaced, but for middle-class jobs there was growth in the economy,” he said.
“It could be that this revolution is very different, because it actually might hollow out the knowledge class.
“I think we’re at a tipping point in terms of what machine learning and voice/image recognition can actually do for the development of services that relate to artificial intelligence,” he said.
“That can actually start disrupting enormous parts of middle-class society and the jobs that we do.”
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