From Monetary To Fiscal Policies
Opportunities In Infrastructure Spending
In 2019 many central banks eased monetary policies to cushion the global synchronised slowdown. Interest rates now stand at very depressed levels compared with previous late cycles. Some developed countries are close to their limits for further monetary easing. Fiscal policy is believed to be a more effective counter-cyclical tool (than monetary policy) for stimulating growth and raising inflation expectations. Expansionary fiscal policy via cutting taxes and building affordable housing should help to combat rising populism. Moreover, some governments are stepping up spending to address environmental goals.
Fiscal stimulus has been underway in many countries, and more is expected in 2020. Investors may benefit from an increase in fiscal spending through:
•Building/construction material stocks
•Renewable energy and clean transportation stocks
•Thematic funds: infrastructure-related mutual funds or private equity funds, green/SRI-related funds
•A re-rating in UK equities
•China policy beneficiaries (multi-assets) e.g. cement, consumer discretionary, staple stocks and selective Corporate bonds
More fiscal spending earmarked to sustainability
Most developed markets have struggled to meet their inflation targets in this business cycle, even though central banks continue to ease monetary policy. We have already witnessed some form of fiscal stimulus as countries strive to improve growth and achieve inflation targets. For developed nations, more fiscal spending is likely to come in the form of green energy spending.
Fiscal stimulus is already underway given the massive tax cut in 2018. In early August 2019, a budget deal was passed to eliminate spending caps, suspend the debt ceiling until July 2021 and increase spending allocations over the next two fiscal years. Post-election, there may be an increase in ‘green’ infrastructure, given that most presidential candidates are in favour of clean energy spending.
There are growing expectations of fiscal stimulus in the eurozone, particularly given the extended ultra-easy monetary environment with negative interest rates that has seemingly reduced the effectiveness of monetary policy. Both Germany and Netherlands are well positioned to implement fiscal stimulus given their fiscal surpluses. Fiscal spending, if any, should likely come in the sustainability space. In fact, the German parliament recently approved a EUR 54 billion package for the next four years to speed up the country's transition to renewable energy, and reduce carbon emissions. The Netherlands is also preparing a national investment fund aimed at supporting the economy sustainably over the next 30 years. Modernising transport infrastructure may be another important way of boosting government spending. The German government recently unveiled a EUR 86 billion plan to modernise the Deutsche Bahn rail network.
With the Conservative Party winning a majority in the election, our base-case scenario is that Britain will leave the European Union by the end of January 2020. However, uncertainty will remain over the future relationship with the EU. We expect some moderate expansionary fiscal policy to cushion the growth slowdown in 2020.
Ambitious infrastructure plans and tax cuts to lift weakening growth
A growing number of central banks in Asia have cut rates to combat slowing growth in 2019. Some countries are turning to ambitious fiscal plans, including infrastructure-spending increases and tax reductions.
Fiscal spending has played a leading role in the latest round of policy easing, including the announcement of RMB 2 trillion (USD 298 billion) in tax cuts and fee cuts (in pension and social security contributions) in 2018. In addition, the Chinese government has called for an acceleration in the issuance of special local Government bonds to boost infrastructure, such as transport, energy, agriculture, forestry and medical care in 2020.
Other Asian regions
India has announced a surprise headline corporate tax cut from 30% to 22%, equivalent to INR 1.45 trillion (USD 20 billion), representing 0.7% of the country’s GDP. Meanwhile, South Korea has put forward a record-breaking budget plan of KRW 514 trillion (USD 424 billion) for 2020, representing an 8% increase from last year’s expenditure when a supplementary budget is taken into account. Meanwhile, Taiwan’s ‘homecoming’ policy with the provision of industrial land and tax breaks, announced in November 2018, has been successful in facilitating the return of 142 companies with approved investment projects valued at TWD 611 billion (USD 20 billion).
•Governments do not deliver fiscal policies in line with market expectations
•Significant delays in the implementation of fiscal policies
•Intensified trade tensions lead to a global recession in 2020. Investors then become ‘risk-off’ which, in turn, hurts equity performance