Needing a Shift of Focus
Following another week in which the US Federal Reserve (the Fed) and Bank of Japan (BoJ) gave their latest pronouncements on policy, we remain concerned that central banks need more help from governments to help propel economies forward. The Fed again delayed raising interest rates but their statement hinted that a change is likely in December. However, it did lower its expectations for how quickly interest rates would rise in the future, boosting all markets. The BoJ continues to experiment with unconventional measures as it now attempts to control bond prices, normally set by markets.
Global markets remain beholden to the utterances of central bankers and will continue to be until governments do more to support economies. Central bankers can control borrowing in the economy and will use tools to encourage borrowing when growth is weak. However, borrowing tends to bring forward growth from the future and we remain concerned about how much more can be done in this way. We believe that significant government spending is required, funded by very long-term borrowing at very low costs. Investment should be directed at infrastructure and other projects designed to enhance general productivity. High government debt levels are seen as a barrier to this course of action but one we believe will ultimately be flouted.
Some policy makers are beginning to discuss investment, most notably in Japan and amongst the US presidential candidates. However, it is likely to take some time before we see a concerted effort. When this effort does become apparent, we will reconsider government bonds as stronger expected growth should lead to higher yields and lower prices. There is little reason to think that growth can strengthen without greater government spending and the Fed appear to be in agreement having just lowered their longer-term growth prospects for the US economy. We are therefore happy to continue holding government bonds as growth is likely to remain a struggle for many economies.