He adds: “It has a deflationary impact via consumers and businesses. The same goes with the collapse of unprofitable technology stocks. Note the recent large layoffs at Twitter and other technology companies.
"All these are necessary to bring forward the point where inflation is back at a more normal level, interest rates can be cut, and the economy can start to rebound. Whilst it is happening in parts of the economy to which we are unexposed to, all the better.
All this is not to say the bear market and recession are coming to an end, that we cannot know, Jane comments.
"We can say that things are progressing as you might expect. The time is coming closer where sufficient slack has been built in the world’s economy that inflation will temporarily abate.
"Markets at some point will want to start to discount the forthcoming rate cuts. Bond yields will then fall and eventually equity markets will recover. Indeed inflation, during the recession, will no doubt overshoot to below its long-term average."
In terms of what this means for investors, he adds: “During this process we expect the market to believe we have returned to the era of lower for longer, where equities and bonds were negatively correlated, and growth was the main style driver of equities.
"We think this will be a false hope, a temporary phenomenon. The structural drivers which drove lower inflation for the past two decades have reversed, we are in an era of deglobalisation and resource shortages."
According to Jane, if you combine this with fiscally reckless governments, then you have a recipe for inflation settling at a higher rate than is generally expected for many years.
Nobody knows anything
The final trend McCaffrey has identified are what he calls “idiosyncratic risks”.
He explains such idiosyncratic risks by saying: “As the dispersion of returns increases, investors will be able to seek out idiosyncratic elements in their portfolios rather than rely on whole market moves to generate returns.
"Opportunities should also begin to emerge among securities driven by longer-term themes such as decarbonisation and reindustrialisation, which could draw investor attention sooner rather than later.”
david.thorpe@ft.com
