BQ Edge | The One Change Macquarie’s Viktor Shvets Says Could Make Or Break Investments

A global pandemic has shut the most economies, roiled international markets and prompted unprecedented monetary and fiscal stimuli, all in a matter of months. But, Macquarie Group’s Viktor Shvets says the virus itself is a mere “noise” that investors need to largely ignore.

The virus will get embedded into human biology like most of them do and the pandemic will pass like those before, the managing director and head of Asia global strategy at the investment bank and financial services provider told BloombergQuint in an interview.

The current pandemic has been magnified by social media, he said, adding that past pandemics show that all viruses become less lethal with time.

Should you be concerned about a second wave? No you shouldn’t. There will be a second wave, a third wave, even a fourth wave. The only thing you need to watch is how do societies adjust.

Viktor Shvets, Managing Director, Head of Asia Pacific and Global Strategy - ‎Macquarie Group

There is one question, however, that investors need to answer to make money—if the steps being taken today will shift the world from the dis-inflationary climate that it has experienced over the last 15 years to a more inflationary climate?

“That’s the question I think that will make careers, will break careers, will make investments and will break investments,” Shvets said.

The world has been in a deflationary environment for the last 15-20 years, barring a few emerging countries, he said. With it, real growth has also been losing pace. This, according to Shvets, is because countries have used monetary levers to drive economies and to achieve high growth rates that the productivity of these economies could never justify.

“The more you use monetary levers like liquidity and interest rates, the more you actually create disinflation, not inflation,” he said. Dependence on these monetary levers lead to higher income and wealth inequality, which then leads to a toxic political and economic environment, he said.

The Covid-19 pandemic has led to a shift in this behaviour where despite immense monetary support from central banks, governments across the globe have announced fiscal measures in multiple tranches. Even the monetary instruments being used currently are more targeted towards those on the ground level, the market veteran said. “That has the potential to actually raise inflation and raise reflation as well.”

Explaining the consequences of inflation or deflation on financial markets, Shvets said a monetary world increases focus on quality, sustainability, growth, etc. as profits accumulate into smaller number of companies. A shift towards fiscal policy changes the picture to one with more pockets of growth, he said. That means the extra price investors are paying for growth stocks will dissipate. “It’s a different style of investment and that’s why it’s important.”

The second thing to look out for is policy errors. Governments and central banks exercise an “overwhelming” amount of control over economies today; so in a state-controlled economy, the biggest risk is policy errors, Shvets said. For example, risk assets will selloff once authorities begin the conversation of reigning in the excess stimulus they have put into the markets. Even then, they will eventually come back to the markets since they control it, he said.