Certain words, such as ‘low growth’, ‘low inflation’ and ‘diminishing returns from monetary policy’, have been plastered across every outlook I have read so far this year. It is an incredibly consensual view and one that has favoured owning sovereign bonds to such an extent that over 30% of that market now trades with a negative yield.
We do not dispute that central banks have lost their mojo but think that it is now the time for politicians to step up. To be clear, we think we may be seeing an end to global fiscal austerity, with a rising likelihood of fiscal easing, with Japan, China and the UK leading the way. This will benefit infrastructure equities and, as such, we have recently initiated a position with the Legg Mason Rare Fund.
‘If at first you don’t succeed, try, try again,’ says the old proverb. That has certainly been the dictum of central banks over the past seven years with their Herculean splurge on monetary policy. All very commendable, except for one nagging detail – it ain’t working.
In fact, central banks, via monetary policy, have achieved precisely the opposite of what was intended: low growth and disinflation. A shift away from austerity now seems highly likely, with all major economies talking about this if not already doing it.
Less austerity means more spend on infrastructure to grease the wheels of the economy, rather than the palms of already rich asset owners. We believe this will provide a useful tailwind to infrastructure companies and believe it is a favourable time to invest in these assets.
This is very different to owning infrastructure investment trusts. While trusts own sound underlying assets, many of them are now trading at lofty premiums, which do not make for attractive entry points.
Having made a quick exit from the doldrums of 2008/09, global growth and inflation have been declining for the past few years. This decline has not been for want of trying on the part of central banks; they have made a truly monumental push and some of the numbers are staggering.
Since Lehman’s collapse eight years ago, we have seen 666 interest rate cuts, $23.4trn (£17.9trn) worth of central bank balance sheet expansion and now have more than $10trn of global sovereign bonds trading with a negative yield. To put it into context, pile up 23 trillion dollar bills and you will have eight dollar-bill towers reaching as high as the moon.
Though central banks have tried, we can safely say it has not really worked. This is not entirely fair, of course, as things would have been a lot worse in the immediacy of 2008/9 had the banks sat back and done nothing.