Could a fiscal shift spur inflation and opportunity?
Fears evolving monetary and fiscal policy may lead to soaring inflation could encourage investors to diversify their portfolios into both defensive asset classes such as gold and more esoteric investments, says Newton¹ real return portfolio manager Suzanne Hutchins.
With markets currently facing the combined threats of trade wars, rising populism and disruptive advancements in technology, there is no shortage of reasons for global investors to feel nervous, says portfolio manager Suzanne Hutchins.
She traces some of the origins of current market uncertainty to central bank responses to the global financial crisis (GFC). In Hutchins’ view, quantitative easing (QE), which was designed to restore market confidence and banks to recapitalise, failed its objectives to stimulate the real economy.
Commenting on the advent of QE, and its impacts she says: “The idea behind accommodative monetary policy was that the economy would help QE work like a machine so that banks could start lending again and companies would become more confident about investing. In reality, the ‘machine’ totally malfunctioned.
“What actually happened was that wealthy investors who did have money saved their cash and less wealthy people built up more and more debt. Corporates who needed the money weren’t lent to and the companies that did have substantial cash reserves used it to buy back their own shares and raise investment prices.
“We believe QE, the great monetary experiment of the last decade, hasn’t really worked. What we have seen is that central bank asset purchases have merely propped up and in some cases significantly inflated asset prices. Yet the real economy does not seem to have benefited. The employment market in particular has seen wages stagnate over time, with everyday workers feeling little benefit from the wider impacts of QE.”
Now, with interest rates rising and heightened market uncertainty Hutchins believes a seismic shift in the global economic landscape could be underway as QE and quantitative tightening (QT) give way to new fiscal measures such as modern monetary theory (MMT) – designed to inject more capital directly into the hands of the real economy.
However, she is sceptical MMT – or further dispersal of so-called helicopter money through exceptional monetary stimulus – will have the intended effect. Instead, she contends, these measures may ultimately trigger a much sharper rise in inflation than policymakers expect.
“In a world where investors have become addicted to cheap money and low interest rates, central banks and policymakers are looking at other measures to help boost the economy. MMT is one of those. Yet one of the reasons some are concerned about MMT is the prospect it could generate runaway inflation if that genie gets out of the bottle,” she adds.
Despite the risk of a return to higher inflation at some point, Hutchins believes so-called safe haven assets like gold could benefit unlike, in her view, fixed income investments.
“Gold has the advantage of being an alternative currency to fiat money. You can’t print it and it will tend to retain its value and do well in an inflationary environment. From a multi-asset perspective, gold does have some specific advantages,” she says.
Hutchins also believes the current uncertain market – and the looming threat of inflation – are encouraging investors to look more closely at multi-asset investing.
Beyond gold, she also believes pockets of value can be found in more esoteric areas, such as the contingent convertible bond sector and through exposure to infrastructure, solar and other renewable energy generation assets, patents and royalties.
Commenting on the broader economic outlook, Hutchins expects more volatility ahead and believes investors should keep their options open by employing a flexible approach that embraces a wide range of asset classes and geographic exposures.
“Surveying the market, we see quite a rocky road ahead. In today’s markets risks appear high and valuations elevated. In this disrupted world investors need to be very flexible and liquid and diversify their opportunity set to make it as broad as possible, while guarding against wider risk,” she concludes.
¹ Investment Managers are appointed by BNY Mellon Investment Management EMEA Limited (BNYMIM EMEA), BNY Mellon Fund Management (Luxembourg) S.A. (BNY MFML) or affiliated fund operating companies to undertake portfolio management activities in relation to contracts for products and services entered into by clients with BNYMIM EMEA, BNY MFML or the BNY Mellon funds.