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Policy: The road to perdition or salvation?

The world is confronted by an enduring slow-growth environment in which recessions stand to be more probable. Populism and nationalism, fuelled by frustrated aspiration and post-truths, are adding to risk in ways not seen since the 1930s, while policy is now a black swan, threatening bouts of intermittent and exaggerated market volatility. However, some countries seem better positioned than others to tackle this environment, while investors are not devoid of choice or opportunity. Unavoidably, the anxious search for yield and return, with interest in riskier and more alternative assets, is set to continue.  

  • Global growth potential is in headlong retreat and, according to some well-informed sources, the risk of another downturn in the US over the next three years exceeds 50%.
  • Pressures to maintain unconventional monetary policy are unlikely to dissipate, and may even intensify. To the extent that in many countries ‘conventional unconventional’ monetary policy is nearing the end of the road, fiscal policy will have to carry more of the burden.
  • Infrastructure investment warrants special consideration because of its ability to stimulate demand directly, ‘crowd in’ private sector spending, and enhance supply potential.
  • Moreover, in extremis, central bankers and finance ministries may have to come together and explicitly embrace the monetary finance of fiscal deficits.
  • Supply potential can be improved by structural reform but efforts since 2008 have, in many countries, been hesitant and uneven. A few, however, have structural policy settings that stand them in good stead (such as Switzerland, the US, the Netherlands, Japan, Sweden, and the UK).
  • There is a sense that for the necessary policy shifts to be accelerated, the global environment would first have to deteriorate; perhaps only a renewed global downturn would be sufficient to concentrate policymakers’ minds.
  • Investors face a difficult environment, in which likely slow policy change stands to cap bond yields, while soft top-line growth and thinner profit margins hamper stocks.
  • Lower returns in traditional asset classes means the demand for alternatives will remain robust. Infrastructure investment is particularly attractive, having important demand-side multiplier effects while at the same time augmenting supply potential.
  • A danger is that, in their desperation to meet the challenges of low returns, long-term institutional investors pursue herd-like behaviour in searching for yield and in the process acquire excessive holdings of high risk, illiquid assets prone to shocks and fire sales.n

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