Don’t expect a fiscal bonanza

Thought of the day

by Chief Investment Office 29 Nov 2019

Political choices will be a crucial factor in market performance in the year ahead. One of the key issues is the evolving debate over fiscal and monetary policy.

With interest rates already close to, at, or below zero, the effectiveness of traditional monetary policy is now diminished, which has given rise to calls for greater use of fiscal expansion to support growth. On Thursday, European Central Bank policymaker Francois Villeroy de Galhau said that Eurozone countries with fiscal space, such as Germany, should use it to promote growth. And French Finance Minister Bruno Le Maire said that Germany has “scope for more spending.”

Coordi­nated fiscal and monetary action could offer material upside to our growth expectations – we expect global growth of 3% in 2020 after 3.1% this year. But, at present, we do not expect significant progress down this road.

  • Major central banks appear to be on hold or have limited appetite for further easing. This week, Federal Reserve Chairman Jerome Powell said, “I see the glass as much more than half full.” On Friday, a People’s Bank of China official reiterated the central bank’s reluctance to accelerate easing, saying that monetary policy has “space” but it cannot be “squandered at will.”
  • Significant fiscal expansion appears unlikely. Despite the calls for fiscal expansion, Ger­many appears committed to its constitutional debt brake and its balanced budget stance for 2020. On Friday, ratings agency Fitch said it expects only modest fiscal loosening in the Eurozone in 2020. Elsewhere, given a divided US Congress and China’s concerns about managing leverage, we do not consider a large fiscal boost likely.
  • Where fiscal stimulus has been proposed, central bankers are urging caution. Japan is an exception, with the government recently proposing a larger-than-expected stimulus package, which could be as much as 10trn yen, equivalent to 1.8% of GDP. On Friday, Bank of Japan Governor Haruhiko Kuroda said that co-ordination between the government and the central bank was probably necessary, but reiterated that the objective of monetary policy is price stability, not financing government debt. He also noted that the Japanese government only had limited fiscal space, so “wise” spending was needed.

While we anticipate greater use of fiscal stimulus by some countries, we do not currently foresee a sufficient expansion to alter our base case for continued sub-trend global growth in 2020. Should Japan’s fiscal plans lead to higher growth, we would likely benefit through our overweight to Japanese equities relative to Eurozone stocks. Overall, with rates likely to stay lower for longer, we continue to allocate our tactical risk budget more toward yield investments than growth, and we hold an overweight in emerging market hard currency debt.

Read more on the investment outlook for next year in our "Year Ahead 2020" publication.

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