What the rise of fiscal stimulus means for advisers

What the rise of fiscal stimulus means for advisers

Advisers have been urged to double down on portfolio diversification, as government spending is forecast to play a bigger role in moving markets than central banks.

Experts say politics and the fiscal policy that comes with it are likely to influence financial markets more than central banks, which are now tipped to act as facilitators rather than the main drivers.

This would be a step change from the past decade, when the Bank of England’s low interest rates and liquidity boosting policies had provided huge support to financial assets, particularly growth stocks.

Stephanie Butcher, chief investment officer at Invesco, said the consequence of monetary policy boosting financial assets was that consumers saw “real assets lagging and wages falling well behind”.

She said: “The voter in the street has noticed this inequality and it has filtered through to politics. You can see it in the ‘levelling up’ agenda in the UK and elsewhere across the globe.

“We suspect politics is likely to be a very real influence on financial markets moving forwards. This is a potential source of risk for clients if portfolios are tilted solely to the monetary regime ‘winners’.”

Ms Butcher added that government spending would not “go back into the distance again now” and would be more focused on getting resources into the hands of voters.

“This has ramifications for the sort of financial assets you want to be exposed to, which may be different to the ones that have done very well in a purely monetary policy environment,” she added.

Targeted spending

The UK government has made a number of spending pledges in recent months, giving confidence to certain sectors that they will receive support for growth and encouraging investors to get involved.

Last month, Prime Minister Boris Johnson announced a £12bn “green industrial revolution”, which included millions of pounds for the development of nuclear power, carbon capture initiatives and hydrogen heating.

Just a week later, Rishi Sunak said investment in infrastructure would total £100bn next year and announced the launch of an infrastructure bank. The chancellor also revealed a £4bn fund for “levelling up” local projects.

Ben Kumar, investment strategist at Seven Investment Management, said that while the impact of monetary policy was to “float all boats”, more targeted allocations from the government would help specific stocks or asset types.

Randeep Somel, fund manager of M&G’s newly launched environmental, social and governance fund, agreed. “We’re now in a situation where we’ve used all our monetary policy firepower,” he said.

“If we need to directly finance certain areas using fiscal policy, we can hit our own goals and create sustainable industries going forward and be a huge driver to the economy.

“These announcements from the government have an impact. When Mr Johnson said combustion-powered cars were going to be illegal from 2030, investors sat up and listened.”

According to Hinesh Patel, portfolio manager at Quilter Investors, the move was like a “transition from tug-of-war to synchronised swimming”, while Russ Mould, investment director at AJ Bell, said big infrastructure projects and fiscal spending could be “the next plan” if the UK could not grow or inflate its way out of debt.