Market Memo: It's a global stimulus party
Many may be focused on the Fed’s latest quantitative easing, a $600 billion long-term bond purchase plan. But we’re seeing extraordinary stimulus measures across all the core economies we monitor. According to ISI, the current global-easing cycle has produced 329 stimulus steps over 16 months.
These plans may include a mix of spending, subsidies, looser credit policies, interest-rate cuts, tax cuts that benefit different demographic groups or corporations, infrastructure development, power-grid development, new social welfare programs, etc. You want it; they got it. And investors should take note: cross-country research shows monetary stimulus and infrastructure development plans typically tend to raise equity prices across most sectors by spurring domestic and corporate demand.
Take Brazil, for example. It is not the largest economy providing new stimulus, but it is one of the most aggressive. It unveiled a transportation infrastructure initiative last August and a ports development package in December. Combined, the two amount to 187 billion real ($92 billion in U.S. dollars), with 133.7 billion real ($65.4 billion) in the first five years. By targeting highways, railways and ports, the spending represents a massive upgrade of the entire Brazilian transportation network. And this is on top of more than 10 benchmark interest-rate cuts initiated by Brazil’s central bank beginning in late 2011.
New Japanese leadership pressing on the gas
Meanwhile in Japan, the central bank has ramped up monetary easing. This week, it adopted an aggressive 2% inflation target and committed to open-ended purchases of assets to achieve this goal—this on top of previous announcements to increase the size of its asset purchase program by 11 trillion yen ($122 billion) and simultaneously create a facility to encourage bank lending similar to what the Bank of England has done. Under this plan, the Bank of Japan (BoJ) will lend an unlimited—yes, actually unlimited—amount to banks at an incredibly low interest rate of 0.1%.
These steps, aimed at encouraging credit demand and spurring growth, come on the heels of the return to power by the Liberal Democratic Party led by Prime Minister Shinzo Abe, who has vowed to do whatever it takes to pull Japan out of a two-decades-long funk. BoJ’s actions reflect this shift, suggesting that like many other growth-challenged global economies, Japan will be more forceful in addressing potential deflation.
It’s worth monitoring countries closely for such extraordinary measures. The reason is simple: Where stimulus goes, stock prices often follow. That is evident in the United States, the EU, the UK and now, in Brazil and Japan. Indeed, Brazil’s Bovespa Index is up nearly 9% since last August, after it unveiled the first leg of transportation infrastructure improvement plan. And Japan’s Nikkei has risen nearly 7% since late December, when the LDP was swept back into power, giving it and Abe the freedom to push for more aggressive economic policies. This massive global easing is a strong positive for risk-on and equities in 2013.
