Investors should position themselves for the upcoming boost in infrastructure spending as monetary policy effectiveness starts to reach its limits, that’s according to JP Morgan’s Global Equity Strategy research team.
In an equity strategy research note sent out to clients at the beginning of this week, JP Morgan’s equity analysts write that as interest rates are approaching or breaching the 0% level, monetary policy is at risk of becoming increasingly less effective and the number calls among policymakers for the increase in fiscal stimulus is growing.
Just two days after JP Morgan’s note was published Japan’s prime minister unveiled a surprisingly large ¥28 trillion ($265 billion) stimulus package. According to Reuters:
“The size of the package, at more than 28 trillion yen ($265.30 billion), exceeds initial estimates of around 20 trillion yen and is nearly 6 percent the size of Japan’s economy. It will consist of 13 trillion yen in “fiscal measures,” which likely includes spending by national and local governments, as well as loan program.”
Buy infrastructure stocks ahead of fiscal stimulus
Analysts at JP Morgan believe that the US will require a similar fiscal package to Japan’s to stimulate growth. They note that US public fixed investment as a share of GDP is running near 60-year lows and at some point in the future, whether policymakers like it or not, the US government will be forced to spend on public infrastructure programs to make up for decades of underinvestment.
However, it’s difficult to put a timeline on such hefty spending commitments. While it may seem like the perfect time for governments begin fiscal stimulus plans, as funding costs are at record lows, the consensus appears to be that policymakers in the US and Europe at least, are still far away from engaging in more aggressive forms of fiscal support. JP Morgan:
“For infrastructure projects – in particular the ones which leave tangible assets in place that are likely to improve productivity of the economy over the long term – the funding should be even less of a constraint, in our view, especially given that many governments can now finance themselves at record-low nominal and real interest rates. Surely the spread between the return on those investments and the financing costs is strongly positive currently.
As it stands now, the consensus appears to be that we are still far away from policymakers engaging in more aggressive forms of fiscal support, but we think that this view would quickly start to change if markets and economic activity were to hit a rough patch.”
There are a number of names JP Morgan believes will benefit in the event that policymakers adopt more aggressive forms of fiscal support:
Japan: Taiheiyo Cement, Obayashi, Tokyo Gas, Shimizu and Asahi Glass
Europe: Saint Gobain, Adecco, Randstad, Arkema, BASF, EDP and EDPR
The UK: Atkins, Balfour Beatty, Carillion, Costain and Kier Group
United States: Manitowoc, Terex, Cummins, Jacobs Engr, General Electric, Autodesk, Adtran, Vulcan, Martin Mrta.Mats., Commercial and Nucor.