Asset owners for one will not be complaining. US stocks have returned 250% for a UK investor, while London house prices have doubled, and that is without factoring in any gains from leverage. For ‘asset owners’, read ‘rich people’, and their getting richer has not done much to improve the growth outlook as they tend to save or invest the windfalls.
Lack of growth
Central bankers look at wider measures of efficacy such as inflation expectations, growth and how much of this extra money is making its way around the economy and into the hands of people that spend it. Herein lies the problem: inflation expectations are way too low, money is not flowing freely and growth rates, while not yet precarious, are lacklustre.
This problem has not always been such but has been exacerbated more over recent years as markets become more and more disbelieving of monetary policy’s effectiveness. One of the ways they express this is through low bond yields, with the aforementioned $10trn (30% of the entire global market) trading with a negative yield.
The race of monetary policy has been run and governments are waking up to the idea that it is time for them to grab the baton and use low or, even better, negative yields to borrow money and invest.
Fiscal measures
There are finally signs that politicians are following the mantra of ‘If you build it, they will come’, tentative evidence of a boost to government spending and a loosening of fiscal policy across the world.
And why would they not be doing this, given borrowing costs for governments are insanely low? In Canada and South Korea, respective governments have recently added to fiscal stimuli. In China, the government continues to boost infrastructure spend, not least around the Silk Road programme Xi Jinping has made the centrepiece of his administration’s plans.
In the UK, the ‘poster boy’ for austerity George Osborne has been shunted to the backbenches of parliament and the new chancellor, Philip Hammond, talks of a different way forward. In the US, mention of the deficit has been banished from Donald Trump and Hillary Clinton’s speeches, and talk of an infrastructure boost is obvious, not least walls on the Mexican border.
In the Far East, the infrastructure splurge will be massive in Japan, as Shinzo Abe has decided to bring it back to growth. Although its infrastructure is better than nearly every other place I have visited, efficient projects certainly help a labouring economy.
Road to growth
These measures would boost already high spending expectations, with developed market spend set to double in the next 15 years and the developing economy spend to almost triple. Much of this outlay will be on transportation and other drivers of growth, including roads, rail, schools and housing.
Spending on infrastructure projects will provide a tailwind for infrastructure equities and is one of the reasons we have chosen to initiate an investment here. Other reasons are its diversification properties, attractive yield, defensive and predictable nature, combined with its inherent inflation protection.
We are not calling a rampant rise in inflation but do think the disinflationary environment we have been in should dissipate. The boot will be taken off the foot of monetary policy and placed on that of fiscal spending as governments cash in on the record-low bond yields.
