Rough times ahead for stocks?

Financial markets rarely look much further ahead than the next central-bank meeting. Yet keeping an eye on the big picture is crucial. Economic history can be divided into "broad eras [that] have shaped economies... policies and asset performance", as Deutsche Bank's annual Long-Term Asset Return study points out. The odds are that we have now reached "an inflection point": a 35-year era is ending and a new supercycle is beginning. Unfortunately, it won't be nearly as pleasant for investors as the 1980-2015 one.

As the 1980s began, China rejoined the world economy, while a few years later the Iron Curtain collapsed, notes Deutsche Bank. This greatly increased the global workforce, while demographics ensured that elsewhere the number of people of working age swelled to historic highs before flattening out again as the 2010s began.

So the demographic tailwind has abated, while a rebellion against globalisation is gathering steam among the lower-income groups in developed states. They have been "the relative losers" of the globalisation era, having experienced scant real income growth. Rampant borrowing during the liberalisation of the past 35 years deflected attention from this trend, but the post-credit crisis years of deleveraging have starkly underlined it. Much of Europe is feeling especially disenfranchised due to the structural flaws of the single currency. "A political accident is a major risk in Europe." A country exiting the euro could cause "chaos for years to come".

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So we face a politically uncertain outlook in a time of low growth and high debt levels. As government debt is already "at levels where sovereign solvency has been questioned in the past", helicopter money will be used to finance fiscal expansion. This implies printed money permanently injected into the system; today's quantitative easing can theoretically be reversed by selling the bonds bought with printed cash back onto the market.

This is hardly an auspicious backdrop for most investments, but government bonds will be an especially bad bet in this cycle, reckons Deutsche Bank. Higher wages (a result of the demographic change) and helicopter money will raise inflation, to which historically absurdly overpriced bonds are now especially vulnerable. That's the best-case scenario. A major default, perhaps caused by a country leaving the euro, is another possibility. Stocks, meanwhile, will do better than bonds but lag their long-term average returns. Valuations are high, while economic and profit growth will be slow. After unprecedented gains in the past 35 years, both stock and bond investors are in for a rocky ride.