Let's get fiscal!

UK fiscal policy

Imagine you're in Theresa May's shoes, what would you do? Fiscal stimulus ticks a lot of boxes. With the UK taking a step towards helicopter money, who benefits?

As Emiel argued a couple of weeks ago a shift from austerity to fiscal stimulus is one of the first steps toward helicopter money. The UK looks like it’s about to take the next step in that direction in the coming months, which could give a boost to some Brexit losers.

 

Aside from Japan, the UK was always more likely than many others to head towards helicopter money, given its institutional framework and history of creating inflation, but the Brexit-induced shock to the economy and political system have provided the catalyst for an acceleration of this trend.

 

Put yourself in Theresa May’s shoes for a moment:

 

  • You're starting with a blank sheet of paper: you have the freedom to make a policy change because you have just taken over government, have no election promises to keep and have installed a Chancellor with almost no publicly expressed views on economic policy.
  • There is a case to boost growth: the economy has just taken a hit and the EU referendum has shown a growing anti-establishment vote.
  • Consensus that monetary policy is reaching its limits is growing: QE is increasingly unpopular with the public (designed by the rich for the rich), its market impact is arguably declining and academic support for a shift toward fiscal policy is growing. And this early in the electoral cycle there would be ample time for fiscal stimulus, even of the infrastructure variety, to bear fruit in time for the next general election in four years’ time.

 

What would you do? A fiscal stimulus seems to tick a lot of boxes. Hetal, our European economist, agrees that a significant fiscal stimulus package is likely to be announced in the Autumn Statement.

 

But the recent experience from Japan tells us that this is a topic the market can get excited about in the run up to any announcements, making it a case of buying the rumour and then potentially selling the news. Speculation over what and how much the government will do to boost the economy seems likely to heat up in the months ahead.

Thinking about the potential beneficiaries of a fiscal stimulus package leads you to many of the stocks that suffered the most after Brexit. UK domestic exposure would not necessarily look great, but probably a lot less bad than it did before. Specific winners and losers naturally depend on the details of any announced plan, but small caps tend to be more domestic than large caps and measures aimed at the housing market and infrastructure seem likely to be close to the top of the list. Stocks with exposure to both of these have been underperformers post-Brexit and only made up some lost ground. They also by and large trade on valuation discounts to both the market and their own history, so it’s difficult to argue that ‘all the good news is already in the price’.

 

We like exposure to helicopter money as a medium-term theme and the UK seems like a good place to start. Looks like it's time to swap those heels for some leggings and sweat bands!

 
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