Aberdeen: R* - visualising an economic concept
How do you take a complex economist report and create not just an accessible explanation, but a compelling conversation? In this video for Aberdeen Investments (formerly abrdn Investments), we used the metaphor of stargazing to explain the concept of R* - the equilibrium interest rate that guides long-term financial market behaviour.
We filmed in a studio to control the visual environment, projecting starscapes and relevant visuals behind the expert Aberdeen Investments speakers, while overlaying full-frame motion graphics to clarify key concepts. The result is a clear, narrative-led explainer that brings macroeconomics into view.
Speaker: Robert Gilhooly - Snr Emerging Markets Economist, Global Macro Research, Aberdeen Investments; and Chris Paine - Investment Director, Macro Investments, Aberdeen Investments
Robert Gilhooly: For centuries, explorers have used the stars to find their way across uncharted waters.
And as economists and investors, one star is particularly important for navigating global financial markets.
It's known as the R* (R-STAR), the Equilibrium interest rate.
Chris Paine: It's determined by slow moving structural trends such as demographics and growth, which pin down interest rates over the long term.
Robert Gilhooly: We might not be able to see it directly, but our star effects everything from the cost of debt through to the value of stocks and property.
And considering its drivers allows us
to answer one crucial question: How low could interest rates fall, now the pandemic era rate rises are over?
Chris Paine: Will interest rates need to remain high due to large government fiscal deficits, aging populations, and the investment needed to fund AI and the green transition?
Robert Gilhooly: Or are rates going to settle back close to pre-pandemic levels?
Here's what we think:
We all know the world is getting older, and as people need to draw down their pensions, the supply of savings will fall pushing R* higher.
Chris Paine: But as workers retire, this simultaneously weighs on growth, as the pool of labor shrinks and weaker growth reduces the need for investment, pushing down on our staff.
Robert Gilhooly: The balance of these two dynamics is crucial in determining interest rates.
Chris Paine: With AI, some hope it will turbocharge growth and investment.
But by increasing the cash piles of a few tech giants, upward pressure on rates may be curtailed.
Robert Gilhooly: US fiscal deficits and policy uncertainty are keeping markets on edge.
Chris Paine: But the downdraft from slower growth elsewhere in the world and deeply connected global financial markets will act to limit upward pressure.
Robert Gilhooly: And overall, this is why we expect rates to head back down over the long term.
Chris Paine: So what does this mean for investors?
Robert Gilhooly: A low future R* boosts fixed income returns, but it also supports equities as it increases the value investors attached to future earnings.
Chris Paine: This Means we can position today's portfolios to take advantage of tomorrow's trends.
Our star might not light the way to undiscovered conscience, but analyzing where is heading helps plot a course for investment opportunities.
Endframe: Aberdeen Investments
