Franklin Templeton exec gives exclusive teaser into macro insights, points to where the next generation of wealth might emerge
Markets remain painfully, frustratingly uncertain. Clients call asking for answers, and their advisors have learned the hard way over the past three years that predicting the near-term can be almost impossible. While he has no answer for these immediate-term concerns, Dr. Ben Meng believes that if advisors want to prepare their clients for the future they need to familiarize themselves with the “5 Ds.”
Meng is the Executive Vice President and Chairman of Asia Pacific at Franklin Templeton. He spoke to WP ahead of his latest publication which will outline the 5 Ds and explain how each of them could impact macro trends like GDP growth and inflation, as well as where the next generation of wealthy individuals might come from.
The 5 Ds are:
- Demographics: A global shift South and East
- Deglobalization: A focus on redundancy driving costs and inflation higher
- Deleveraging: A potentially ‘ugly’ period marked by very expensive debt
- Decarbonization: A profound shift in the global economy brought on by climate change
- Digitalization: The rise of AI as a potential source of disruptive growth
“The macro environment is probably one of the most challenging we have seen in decades,” Meng says. “Of course, investors are nervous about this kind of environment, and financial advisors have to find a way to bring order in this chaos. One way to do that is to take a step back, look towards the medium-long term and ask what trends today can move economic growth and inflation.”
Meng splits the 5 Ds into two groups: looming and immediate. Demographics and decarbonization represent a pair of looming “slow moving trains,” their effects will not be felt immediately but they are also very hard to avert.
Birth rates and death rates don’t change overnight, and the trend towards population growth in Southeast Asia, South Asia, and Africa will not reverse. Nor will the aging populations in North America, Europe, and developed East Asia. Those aging populations will be less productive, while demanding more from key sectors like healthcare. Meng does note, however, that Canada’s immigration policy may spare it the worst of its demographic crisis.
Climate change, too, is an inevitability that will be felt more acutely over time. As the world experiences the impacts of climate change, Meng believes the push to decarbonize will increase in pace. Demand will grow from governments, businesses, and individuals for technologies and solutions that can bring them towards net zero carbon. In both of these trends, Meng believes advisors thinking long-term should position their clients to capture tailwinds over time. He also believes that as advisors look for the next generation of wealth creators, they should look at entrepreneurs working in this space as the new green economy becomes more vital.
The three more ‘immediate’ trends represent both risks and opportunities for advisors today. Deglobalization, deleveraging, and digitalization could spark immediate changes in the balance between growth and inflation and sitting on the right side of those trends can drive value for clients.
Deglobalization represents an inflationary risk. Globalization drove down prices and offered deflationary pressures by creating a more even global market. The shift since around 2016 away from globally integrated economies has forced businesses to build in more redundancies to their supply chains. There has been a shift, Meng says, from ‘just in time’ to ‘just in case’ which creates inefficiencies and drives costs higher. At the same time, open global trade was a growth driver in the 90s and 2000s. Meng sees a shift towards harder borders as a growth inhibitor for the future.
Deleveraging is a natural outgrowth of the huge amounts of sovereign and private debt accrued in the past few years. Meng believes that countries and individuals may be forced to deleverage. He thinks we may be headed towards “ugly deleveraging” as the back end of the yield curve has risen somewhat, likely prompted by “bond vigilantes” – investors selling long-term treasury bonds to depress prices as a form of protest against central bank policies. This investor-led deleveraging can cause economic devastation, Meng says, and could push long-term yields higher than 7%.
While this deleveraging can be deflationary, it can severely inhibit growth as extra money is used to pay down debt. He thinks that advisors may want to talk to their clients about eliminating possible debts to deal with the looming risk of higher-than-expected interest rates.
The final D is where Meng sees potentially the greatest opportunity: digitalization. He argues that while AI’s impacts are still unknown, it can be both a growth driver and an inflation inhibitor. By improving productivity while potentially limiting or even reducing costs, AI tools could make a huge difference for global economies. Similar to the green economy, Meng thinks that advisors should look at AI entrepreneurs for the next generation of wealth creation.
While each trend comes with risks and opportunities, Meng believes that taking a fulsome view of these forces and relaying them to clients can help advisors drive value and allay short-term anxiety.
“Every client has different needs, but having the big picture in mind and taking a bit of a longer horizon can help them,” Meng says. “The near-term is all uncertainty and anxiety. There is not a lot of good news today, from war, climate change, deleveraging. But I believe that capitalism and human nature will eventually work in that longer-horizon. If [advisors] can afford a longer time horizon, they should ignore those short-term difficulties and focus on the longer-term.”
