Faith in loose monetary policy is depleted and “red-blooded fiscal expenditure” is on the verge of returning – yet this hasn’t been priced into markets, Liontrust’s Jamie Clark (pictured) says. 
The manager, who co-runs the Liontrust Macro UK Growth and Macro Equity Income funds alongside FE Alpha Manager Stephen Bailey, says this potential turnaround in policy is likely given quantitative easing has failed to normalise economic conditions.
As such, he warns that investor “mainstays” within the consumer staples and tobacco sectors could be vulnerable to de-rating.
Clark refers to US economist Larry Summer’s recently-published article referring to a potential comeback of ‘secular stagnation’, when economic growth remains slow over a long period of time and encourages saving rather than investing.
Global GDP growth since 1961
Source: The World Bank
“Summers, along with the IMF, argues that sluggish, post-crisis growth is a symptom of a long-term shortfall in aggregate demand, which results in a preference for saving over investment and has pulled down real interest rates over several decades,” Clark said in his latest update.
“From this perspective and absent negative interest rates, policy can’t push rates low enough to excite the animal spirits of business and consumers.
“Summers’ prescription is lifted from the Keynesian playbook. With borrowing costs at historic lows and markets seemingly untroubled by government indebtedness, he urges politicians to borrow and finance infrastructure.”
Quantitative easing (QE) has been implemented since the financial crisis of 2008 in a bid to stimulate economies and boost growth.
While markets tend to react positively when further loose policy is announced (Carney’s expansion of QE on ‘Super Thursday’ in August led to the FTSE 100 rising by 312 basis points over the following week), a number of industry commentators warn that investors have become too accustomed such an unusual market landscape.
Performance of FTSE 100 one week after ‘Super Thursday’
Source: FE Analytics
In an article published in August, Clark’s colleague Olly Russ, who manages the Liontrust European Income and European Enhanced Income funds, warned that the latest policy expansion was not as cautious as it should have been given post-Brexit uncertainty.
“We have not yet seen the chancellor’s fiscal response to Brexit and the Bank is responding to its own forecasts, which at this stage are probably best classified as ‘guesses’,” he said.
“What impact the new QE will have is debateable, but there is a risk it looks like a panicked reaction to a political event rather than a measured response to an economic one.”
More and more investors are becoming concerned that central banks are lacking the ability to boost global growth and that loose monetary policy can only continue for so long.
While he reasons that QE averted a systematic implosion during the financial crisis, Clark says its impact on economic performance has generally been limited, with global recovery remaining shallow.
“Growth sits short of pre-crisis trend, productivity gains have been negligible, but inflation is muted. With rates lodged at zero, evidence suggests that subsequent and larger doses of stimulus will not change this. Leave aside the issues of whether QE is stoking asset price bubbles and has exacerbated social inequality,” the manager said.
“Why has QE failed to encourage a return to normal economic conditions? Explanations vary from the deleveraging that follows financial busts (Rogoff & Reinhart), to a secular decline in innovation and growth (Gordon).”
However, Clark believes the most popular theory is the return of secular stagnation and, as such, argues this could well influence policy and government action.
For instance, he points out that both US presidential candidates have promised significant infrastructure packages and says that where the US leads, the UK tends to follow.
“Jeremy Corbyn advocates an infrastructure-focused ‘People’s QE’. Stephen Crabb, in his failed bid for Conservative leader, endorsed a £100bn ‘Growing Britain Fund’ to finance transport, social housing and schools,” the manager continued.
“Guided by Brexit anxieties, chancellor Hammond has jettisoned his predecessor’s fiscal consolidation timetable and hinted at an infrastructure maintenance programme and housebuilder concessions. And whilst we wouldn’t expect the Autumn Statement to open the fiscal sluice gates, Theresa May’s criticisms of QE imply that fiscal policy is held more favourably.”
To benefit from increased infrastructure spending, Clark owns the likes of Rio Tinto and Anglo Pacific. He has also increased the funds’ exposure to construction firms Galliford Try and Kier Group.
Alongside an existing position in housebuilder Telford Homes, the team has also added Barratt Developments, Persimmon and Taylor Wimpey to the portfolio.
Performance of stocks over 5yrs
Source: FE Analytics
“Ultimately, macro-themes are dynamic and uncircumscribed. In likelihood, the theme will mature and transmute,” the manager said.
“To our minds, if fiscal activism succeeds where monetary policy has failed, both growth and inflation expectations will rise and richly rated income fund mainstays, like tobaccos and consumer staples, seem vulnerable to de-rating.”