Governments told growth depends on open wallets

Money managers and institutional investors have a message for governments in developed markets: It's time to spend some money.

Their concern is that monetary policy, necessary in the aftermath of the financial crisis, has reached its limits. Adding a hefty shot of government spending could work in tandem with that effort, creating growth, improving tax receipts and, at the same time, potentially making much-needed improvements to infrastructure.

The shape and form of each country's fiscal policy will likely vary — across so-called helicopter money, infrastructure spending and tax breaks.

“Monetary policy is not going to rebuild the economy. We need other things, and that is fiscal stimulus,” said Carsten Stendevad, CEO at Danish pension fund ATP, Hilleroed, which has 800 billion Danish kroner ($119.9 billion) in assets. A number of countries — particularly Germany and some countries in northern Europe — can afford fiscal stimulus, he said.

“The incremental effects of further monetary policy I think are highly limited. The distortive effects of monetary policy in the financial market and the real economy, including a number of real estate markets, are very clear. So we need other policy instruments to be put forth. The area of infrastructure is the obvious place to start,” Mr. Stendevad said.

His view was echoed by Antony Barker, Manchester, England-based director of pensions at Santander U.K. PLC, sponsor of the £11.3 billion ($15 billion) Santander U.K. Group Pension Scheme Common Fund.

“I've regularly said policy is the wrong way round — (the government) should issue 100-year gilts and use the money to build” a number of U.K. infrastructure projects. “Apart from the direct economic/employment benefit of these infra deals, generating a long-term gilt price point will help hedging/valuations and extra supply should hopefully improve yields, meaning companies can invest in their businesses rather than fund made-up deficit numbers,” which in turn would generate further economic growth, profits and tax receipts, said Mr. Barker in an e-mail.

Sources also cited comments by Mario Draghi, president of the European Central Bank, at a press conference this month announcing that the ECB governing council left rates, and its asset purchase program, unchanged at its latest meeting.

“It is something I have been saying now for months, that to reap the full benefits of an extraordinarily accommodative monetary policy, one needs other policies,” Mr. Draghi said.

A number of money management executives also added their voices to the call for fiscal spending, although they are split when it comes to the form it should take. Some agreed with pension fund sources that infrastructure spending is the way forward.

Marino Valensise, head of multiasset and income at Barings in London, said helicopter money, which involves the printing of money and its distribution to the public, is “superior” in the short and long term. “If it generates some inflation — and it will — that is great news. The world as it is today has accumulated so much debt that it won't be able to repay it. If (a country) does not want to restructure or default — which would be unpalatable for a G7 country — the only alternative is to grow out of its debt or inflate away part of that stack of debt.”

Growth is not a “credible forecast for the world. There is only one China,” so there is a need to create inflation. “It has to be big but more importantly targeted so to increase the prosperity for the majority of people,” Mr. Valensise said.

While governments have implemented some forms of spending, such as bailing out the banks in the years since the global financial crisis, more is needed.

“Since the crisis, fiscal policy has not been used to effect — maybe politics is paralyzing the use of fiscal policy — and the entire burden of any kind of stimulus has fallen on monetary policy,” said Salman Ahmed, chief investment strategist at Lombard Odier Investment Management in London. “What we need is a proper shift, not necessarily (of) the same scale as monetary policy developments ... but it has to be frontloaded as we need growth now, not in five years' time.”

Paul Brain, London-based head of fixed income at Newton Investment Management, said the firm has been talking about the need for spending for about a year now, and acknowledged that conversation on the topic has picked up outside the company, too. As economies restructure post crisis, “whatever the central bank does is a sticking plaster to stop a serious economic decline,” he said.

What is also needed is a higher target for inflation. The ECB, for example, is aiming for inflation close to but below 2%. Xavier van Hove, London-based fund manager responsible for running $2.3 billion in global and European equity funds at GAM, said inflation needs to be at 3% to 4% for savers to start spending.

The financial crisis, he said, has left individuals and corporations psychologically predisposed against debt. “So the traditional answer that making debt cheap enough will incentivize borrowing and spending doesn't apply today,” Mr. van Hove said. Cheap money will not change a now conservative attitude toward borrowing or spending among individuals and corporations. “What we need ... is government spending,” he said.

Sources said such spending would bring some relief to pension funds and other institutional investors, which have been battered by low interest rates and yields.

“Easing money hasn't been without cost. It has cost pension funds dearly, and corporates and the funds they have sponsored,” said Mr. van Hove.

Wilshire Consulting said U.S. corporate pension plans' aggregate funding ratio was 76.2% at the end of August, falling 5.1 percentage points year-to-date. JLT Employee Benefits said the funding ratio of U.K. defined benefit funds was 74% at Aug. 31, vs. 78% a month previous and 83% as of Aug. 31, 2015.

“If we can raise the nominal GDP rate of an economy, and perhaps modestly raise inflation, the assets we own in pension funds over time will easier match liabilities,” said Mr. Brain.

The liability side of the pension fund balance sheet would also improve, were bond yields to rise.

Infrastructure spending may also present investment opportunities for pension funds, said sources, although that is not the ultimate goal, said ATP's Mr. Stendevad. “On the one hand, (fiscal policy) might create investment opportunities for us — that would be nice. But that is not why we are asking for it. I would support it even if it didn't mean a single opportunity for us. It is for the effect on the economy; we have made great money over the past couple of years, achieved fantastic returns helped by monetary policy. But we would much prefer to do that supported by economic fundamentals,” he said.

While sources are sure the time is right for government intervention, they are not convinced that their prayers will be answered.

“On the fiscal policy side right now, resistance is mainly political,” said Mr. Ahmed. He said it is unusual for fiscal policy to be deployed outside of a crisis. “The current situation I would describe as a slow-burn crisis — we have slow growth, very low interest rates.”

Benjamin Mandel, executive director, global strategist in the multiasset solutions group at J.P. Morgan Asset Management in New York, agreed that a sudden change to fiscal policy outside a recession is unlikely.

“We have no illusion about it happening suddenly,” Mr. Mandel said. “The political side of fiscal policy is more complicated (than monetary policy). Those controlling the government budget don't have the luxury of being independent central banks. Fiscal ... operates with a little more inertia, typically needing a big, galvanizing event to get loosening,” he said.