Surprise fiscal support would have a big impact

Peter Rutter

Royal London Asset Management

An important issue for investors to consider in 2020 is the potential shift in the relative importance between monetary and fiscal policy in driving the global economy and investor sentiment. 

Will the baton pass from central banks attempting to drive the economy through low interest rates, to governments and politicians taking responsibility for driving growth and avoiding recessions through tax cuts and government spending?

After more than a decade of central banks and low interest rates dominating economies and markets, 2019 saw the emergence of a debate on its long-term efficacy. Whether it is concerns about the limits of central bank influence, the unintended long-term impacts of low or negative rates and/or the emergence of populist politics supported by low government borrowing rates, change could be afoot.

It’s not so much we have a strong view that this actually happens, but our analysis suggests that markets and investors have priced in much of the status quo – in terms of market levels, long-term bond yields and the dominance of certain themes and styles in markets.

As such any shift in the balance between monetary and fiscal policy could have a profound impact on market levels and leadership. Examples might be growth stocks versus value stocks, the loss of capital on government bonds currently with negative yields or cyclicals versus defensives.

Each of these dichotomies has basically trended in one direction for much of the last decade. Ever lower interest rates and bond yields driven by central banks have captured the economy and markets. While that may continue, a key thing to watch out for in 2020 might be that dynamic changing: given how markets are currently positioned, the impact could be very significant.

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This wire is part of the ‘One thing investors can’t ignore in 2020’ series. To download the full ebook please click here.



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Head of Equities
Royal London Asset Management

Peter is Head of Equities at Royal London Asset Management as well as the Global Equities team, and a Senior Portfolio Manager with over 16 years of experience. He graduated from Christ’s College, Cambridge University.

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