Globalisation is a fact of life for us all – but whether it has been a ‘good’ thing or not depends on who you are. There is a view that globalisation has increased inequality. This is not true on a global scale.
Globalisation has been the biggest recent factor in reducing global income inequality and has contributed to a significant reduction in global poverty rates. The numbers here are quite compelling.
However, within countries, globalisation has been a factor in increasing inequality. It is not the only variable: rewards for education, stagnating social mobility, growth of information technology, higher rewards for company management, inadequate competition, and the growth of dominant players in some markets – all have been relevant and interact with globalisation trends. However, we are perhaps just beginning to see signs of countries reaching a tipping point. In China, there appears to be a backlash against excessive rewards, while last week saw the Democrats talking about measures to penalise stock buy-backs and curb CEO remuneration packages.
Does inequality matter to markets? Yes – according to a paper presented at the recent Jackson Hole meeting of central bankers. Prepared for the Kansas City Fed, the submission argues that that rising income inequality is an important factor explaining the present level of real yields. The argument challenges the view that savings of the baby boom generation were a prime cause of lower yields. In essence, as the rich have a lower propensity to spend, more savings are available for financial and real assets as the wealthy manage their personal balance sheets. This drives down yields, rewarding the holders of assets, thereby creating a loop which reinforces income and wealth inequality. The paper challenges the view that yields will rise as the baby boom generation move to dis-saving in later life, concluding that income growing inequality within countries will keep yields low unless macroeconomic and other policies are adopted to address these trends.
Cash and government bonds
Despite some volatility government bonds yields did not change much over the week. In the US, 10-year yields were broadly unchanged although the yield curve steepened a bit. US real yields were unchanged which contrasted with the UK where real yields became less negative, reflecting a move higher in nominal yields. Euro government bond markets were weaker across the board with 10-year French bonds approaching zero.
After two months of upside surprises, the US August payrolls figure fell short of expectations. Non-farm payrolls rose 235K after 1053K (an upward revision), compared to consensus expectations for a 733K gain. Our economist, Melanie Baker, thinks there may have been some technical factors behind the lower payroll gains (e.g. disruption to usual seasonal patterns of work), but it is hard to see those being large enough to account for all the shortfall. Overall, this further casts doubt on the timing of tapering. Perhaps tellingly, these figures had little impact on government bond yields. This may have been because the unemployment rate was in line with expectation and average hourly earnings came in quite a bit stronger.
The contraction in high yield credit spreads continued, reversing the move higher seen in August. Total refinancing costs in high yield remain extremely attractive and is one reason why the wave of defaults predicted at the start of the pandemic has not materialised. Some stability has returned to emerging markets and while the news flow on Evergrande gets no better the story elsewhere is better. New issuance has started to pick up and this is expected to be the feature through September.
In investment grade credit, spreads remain anchored at their year-to-date lows. We saw some aggressive buying of the short end of the sterling market last week and generic investment grade credit in the 0-3 year area offers few relative value opportunities. New issues from housing associations were well received as was a new issue from Australian insurer QBE – where the book exceeded £2bn (£40mm issued).
In a week in which Cristiano Ronaldo re-signed for Manchester United it is interesting to note that 50 years ago a top footballer would have been paid less than £500 a week. The reputed weekly wage for Ronaldo is nearly £500,000 and for Messi at PSG it is even more. This says a lot about how football has changed – but also how the elite in their respective areas of excellence have seen rewards explode.
Past performance is not a reliable indicator of future results. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are the author’s own and do not constitute investment advice.