Black swans, nonlinear history and financial markets

The world is changing. A novel world is emerging – and we anticipate a return of inflation, a bull market in China and elevated geopolitical volatility.

The world is changing. Investors can sense it. Pontificators are out, well, pontificating. While very few things are entirely certain, there are dominant threads emerging. The old world of the past decade is drawing to an end (thankfully). The next decade will be dominated by a few powerful secular themes:

  • A shift from deflationary threats to the resurfacing of inflation
  • Even more unruly, myopic and volatile international competition (with low collaboration)
  • A further retreat of liberal, meritocratic capitalism

The recent past (post Global Financial Crisis) was characterized by a financial world with:

  • low inflation and central banks’ fears of deflation
  • low (negative) interest rates as central banks employed unconventional tools to address deflationary fears
  • financial asset price inflation, elevated by such unconventional monetary policy
  • exacerbating inequality within countries as a result of concentration of asset ownership
  • weak growth, low bank returns (low asset yields and significant regulatory capital/liquidity burdens)
  • the failure of interest rates to boost capital formation, but instead an excessive amount of leverage placed on speculative assets (private equity, venture capital) and incentives to leverage corporate balance sheets (buybacks and debt)
  • capitalism struggles with low interest rates (and a speculative temperament) restraining “creative destruction,”, or players with real competitive advantages in terms of technologies, channels and others, while simultaneously funding “disrupters” with no clear path to profitability, but addicted to growth for growth’s sake
  • weakness in developing market (ex-China) currencies and economies as imbalances that are both external (volatile commodities, weak global trade) and internal (fiscal and credit) destroy the promises of growth
  • a significant outperformance of the dollar and US assets versus everything else

This all occurred against the backdrop of a social-political world of:

  • growing national chauvinism (read “populism”)
  • heightened sensitivities to inequality and the perception that the “rich are different than us”
  • an absence of global cooperation on existential issues (trade, immigration/refugees, nuclear proliferation, failed states, climate change, and obviously pandemics)
  • the retreat of an increasingly bellicose USA leadership
  • cultural/social civil war issues that distract presidents from delivering historical leadership
  • growing rivalries among great powers, particularly between the US and China

The new world dawning has been accelerated by this dreaded virus and its economic aftermath.

The new financial world will likely be characterized by:

  • the return of inflation led by unprecedented fiscal expansion during non-war eras
  • financial repression (regulation, exchange rates) designed to mitigate pressures
  • political intervention to address frustrations over “quality of opportunity” in liberal, “meritocratic” capitalism, with a retreat to post-war efforts to repair physical infrastructure and improve the quality of public services such as health care and education
  • a shift in policy focus from the spear of Quantitative Easing (monetary) to the club of MMT [Modern Monetary Theory] 1(fiscal), including the seductive possibility of universal basic income as a means to address deep frustrations with inequality and the falling real wages of the majority of the population in developed economies
  • a weaker dollar and a derating of US equities as interest rates (and potentially taxes) rise and corporate deleveraging responds to the bad last experience (illiquidity)
  • initial confusion over emerging market (EM) equities given fiscal/external frailties (Latam America, Sub-Saharan Africa) in risk-off drawdowns
  • eventual separation between China and “everything else” in the EM world
  • what we believe could be a major bull market developing in Chinese equities (and all assets)

This new world will exist against the backdrop of the social-political world characterized by:

  • the return of the Leviathan2, with a focus on greater equality in the developed world and an unwinding of the 30-40 year of “meritocratic capitalism,” amplified by perceptions of “socialism” for the rich (bailouts, monetary stimulus)
  • ever more turbulence in global cooperation as fading hegemony turns even more insular
  • the gap between global “commons” problems (climate, health, weak/failed states, nuclear proliferation) and global willingness and capacity to address these issues rises to a boil
  • the great power discord between China and the US is irresolvable, remaining an open wound
  • the European project hits the rocks again, like a failed marriage, over unwillingness to create a common fiscal framework and the inability of Southern European economies to rebalance through necessary devaluation
  • frustrations build around the US dollar as the reserve currency, while the US Federal Reserve does not have the political support to act responsibly as the lender of last resort in a volatile world of global capital flows and a result of the “weaponization” of the dollar during the Obama and Trump administrations, and its perceived violation of sovereignty by the victims (such as Iran, Russia, China, Turkey and others)
  • China emerges as THE singular growth engine and an equal with the US
  • China real growth over the next decade is led by powerful structural reform, improved capital allocation (higher returns, greater productivity) and consistent urbanization (the “hukou” reform seems to have not been appropriately digested by markets this past week3)
  • China’s currency, the renminbi, appreciates and brings much of Asia into its orbit

Figure 1: Investment themes have shifted drastically throughout past decades

Source: GaveKal, as of 06/30/2019. Investment conclusions for 2020 onwards are made by the blog’s author.

Conclusions to be drawn from these changed conditions

We believe the investment conclusions that can be drawn from these new circumstances are intuitive:

  • non-dollar assets will likely outperform US dollar assets
  • China could be the next BIG equity market story. (See Figure 1 for investment themes we believe have characterized recent decades and what could be the key themes over the next 10 years.)
  • EM economies ex-China will likely muddle through (as they always have done), but winners may have to contend with weak global trade growth and be committed to deep structural reform. (We anticipate Indonesia, Philippines, Peru, and Russia will be the leaders in this.)
  • The survivors will likely thrive as the economic crisis diminishes competition and presents opportunities for non-organic growth (benefiting companies like Kering, China Lodging, Yum China, Kotak Bank, Novatek).


  1. Modern Monetary Theory is a macroeconomic theory that says monetarily sovereign countries like the US are not operationally constrained by revenues when it comes to federal government spending.
  2. Leviathan is a metaphor for state capitalism, or the widespread influence of the government in the economy.
  3. Hukou is a system of household registration used in mainland China. The reforms are designed to allow people to move more freely inside the country. Specifically, on 4/9/2020, China’s Communist Party Central Committee and the State Council published new policy guidelines to further liberalize its economy in terms of land, labor and capital markets.


  • As of 12/31/19, Kering SA, represented 5.09% of Invesco Oppenheimer Developing Market Fund’s Holdings; China Lodging, 0.0 %;  Yum China Holdings, 2.57%; Kotak Mahindra Bank, 2.83%; Novatek, 4.54%; IBM, 0.0%; AT&T, 0.0%; NTT, 0.0%; Bank of Tokyo-Mitsubushi, 0.0%, Industrial Bank of Japan, 0.0%, Microsoft, 0.0%, ExxonMobil, 0.0%; General Electric, 0.0, NTTDocoMo; 0.0%; Petro China, 0.0%; Apple, 0.0%; and Amazon, 0.0%.
  • As of 12/31/19, Kering SA, represented 0.00% of Invesco Oppenheimer Emerging Markets Innovators Fund’s Holdings; China Lodging, 0.0%;  Yum China Holdings, 3.25 %; Kotak Bank, 0.0%; Novatek, 0.0%; IBM, 0.0%; AT&T, 0.0%; NTT, 0.0%; Bank of Tokyo-Mitsubishi, 0.0%, Industrial Bank of Japan, 0.0%, Microsoft, 0.0%, ExxonMobil, 0.0%; General Electric, 0.0%, NTTDocoMo; 0.0%; Petro China, 0.0%; Apple, 0.0%; Amazon, 0.0%.

Important information

Blog header image: Joseph Choi/ Stocksy

Foreign investments may be volatile and involve additional expenses and special risks, including currency fluctuations, foreign taxes, regulatory and geopolitical risks. Investments in securities of growth companies may be volatile. Emerging and developing market investments may be especially volatile. Eurozone investments may be subject to volatility and liquidity issues. Investing significantly in a particular region, industry, sector or issuer may increase volatility and risk.

The opinions expressed are those of the author as of April 14, 2020, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.

This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial advisor/financial consultant before making any investment decisions. Invesco does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state tax laws are complex and constantly changing. Investors should always consult their own legal or tax professional for information concerning their individual situation. The opinions expressed are those of the authors, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.

Holdings are subject to change and are for illustrative purposes only and should not be construed as buy/sell recommendations.

Justin Leverenz is a Team Leader and Senior Portfolio Manager for the OFI Emerging Markets Equity team at Invesco.

Mr. Leverenz joined Invesco when the firm combined with OppenheimerFunds in 2019. He joined OppenheimerFunds in 2004 as a senior research analyst. Prior to joining OppenheimerFunds, Mr. Leverenz was the director of Pan-Asian technology research for Goldman Sachs in Asia, where he covered technology companies throughout the region. He also served as head of equity research in Taiwan for Barclays de Zoete Wedd (now Credit Suisse) and as a portfolio manager for Martin Currie Investment Managers in Scotland. He is fluent in Mandarin Chinese and worked for over 10 years in the greater China region.

Mr. Leverenz earned a BA degree in Chinese studies and political economy and an MA in international economics from the University of California. He is a Chartered Financial Analyst® (CFA) charterholder.


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