‘Creative destruction’ could be a boon for bonds

Portfolio manager explains how government-instituted lockdowns could be a blessing in disguise

‘Creative destruction’ could be a boon for bonds

Humanity may be on its way to recovering from the pandemic, but the fact that it will leave a deep scar on the global economy is a foregone conclusion at this point. Still, one portfolio manager argues that the world will emerge better from the crisis in time – not just in spite of it, but also because of it.

In a recent blog post, Jim Mulally, fixed income portfolio manager at Capital Group, recalled the decades-old economic concept of “creative destruction.”

Coined in the 1950s by Austrian economist Joseph Schumpeter, it describes how obsolete companies, products, and services are constantly replaced with new ones through an unending cycle of innovation by profit-driven entrepreneurs.

“This big-picture, fundamental economic concept will have a major impact on investments for the next several years,” Mulally said.

Being careful not to downplay its immediate harmful fallout, he said the COVID-19 shutdowns have extracted a brutal human toll. On the economic side, it has kicked off at process of “creative destruction at lightspeed,” compressing a cycle that could have occurred over years or decades into a period of less than one year.

“This development could be negative for bonds in the early stages, as expanding demand runs into supply disruptions,” he said, noting that productive businesses are generally still reliant to an extent on unproductive companies and industries for inputs into their own products and services.

Such hiccups in supply, he said, could give way to a stint of higher inflation that might inspire second thoughts from central banks that have committed to zero interest rates. That, in turn, could have a knock-on impact on bond markets.

“But beyond that period, the major improvement in productivity should support non-inflationary growth,” he said. “That’s a major positive over the long term for capital markets, including the bond market.”


Follow WP on FacebookLinkedIn and Twitter