Stating the case
A series of structural challenges are rendering the pace of global economic growth more moderate than in recent decades, and this is only intensifying electorates’ disillusionment with both the political and corporate establishment. Furthermore, this environment is exacerbating antagonisms between nations, not least that of an ascendant China and the US.
Against this backdrop, we envisage governments and their associated monetary authorities being forced to maintain a level of state intervention that is elevated compared to the decades preceding the global financial crisis.
Central-bank stimulus has been the dominant form of state intervention since 2008, and may yet become more extreme during the next cyclical downturn.
However, given the apparent lack of traction that policies such as quantitative easing (QE) have had upon the ‘real’ economy, this is likely to be accompanied by, and possibly intermingled with, fiscal policy. Greater levels of protectionism and regulation are also likely to constitute part of the populist politician’s toolkit.
What does this mean for investors?
We must remain up to date with new developments in US-China relations, expect greater protectionism as governments try to maintain or gain a share of lacklustre global demand, and be vigilant to corporate wrongdoing, as cash-rich companies are an attractive and lucrative scapegoat for hard-pressed governments to target. For the moment we maintain a focus on policy stimulus, regulation and defence spending.
State intervention is a theme that affects companies and industries around the world. All firms are affected to some extent by increasing income inequality, a crackdown on corporate crimes, systemic changes owing to increasing protectionism and tension between two of the world’s biggest powers, and we must remain mindful of these forces as long-term investors.
Meet the team
We have a research group for each theme, made up of analysts, portfolio managers and other members of the investment team, that collaborate on new thematic ideas and analysis. Here are the co-leaders in the state intervention theme group.
Portfolio manager, Real Return team
Portfolio manager, fixed income
Responsible investment analyst
Our key areas of focus
- The boundaries between fiscal and monetary policy are becoming increasingly blurred. ‘Modern Monetary Theory’ (MMT) is being touted by some (including central bankers) as the answer to the continued need for more stimulus. However, even without MMT, fiscal policy is likely to increasingly aim at redistribution of income, as a political expedient.
Regulation and control
- Governments around the world are increasing their regulation, and their control of markets and market participants. This is being driven by two forces. First, a swing back to nationalism means that governments are using regulation and control to pursue state-level objectives such as promoting exports, protecting local industries and building infrastructure. Second, as social and environmental risks become better understood, governments are increasingly using regulation in an attempt to reduce the negative consequences of the production or consumption of goods/services that the free market is not able to price or solve effectively.
Offence and defence
- A deceleration in the pace of global economic growth and increasing inequality have contributed to a surge in populism. In response, many governments have moved to adopt a range of more interventionist policies, a number of which have an international impact, such as currency depreciation and trade tariffs. At the same time, China has emerged as a major economic, and increasingly military, power and is seeking to harness its influence overseas, threatening to bring to an end an era of undisputed US supremacy. Against this backdrop, and reflecting a parallel rebound in the Western defence cycle and looser fiscal policy, spending on military hardware and broader defence capabilities is rising.
A deep dive into…
What lies ahead for US monetary policy
In our view, in order to assess quantitative easing properly, it is important to focus on the increase in commercial bank reserve balances with the US Federal Reserve.
Of course, our themes don’t exist in a vacuum
China provides a powerful example of how the state can interact with the economy. Our China influence theme is dedicated to considering the impact of this growing world power.
Our increasingly financialised world has been created in part by the actions of the state. Our financialisation theme explores the changing financial landscape in more detail.