Economic and Strategy Viewpoint – November 2019

Independent Pilots Financial Services is part of the Benchmark Capital Group, backed by FTSE 100 company Schroders. Our investment committee often draws upon Schroders vast resources. This piece is written by one of their investment writers.

This month’s Viewpoint discusses the outlook for US corporate profits, the debt picture in emerging markets, and the lessons we can draw from Japan’s experience of fiscal stimulus in the 1990s.

Profits outlook poses a challenge for US equities

The supportive tailwind from lower interest rates is likely to fade, and earnings will have a crucial role in determining equity returns with stock prices to be driven by the real state of the economy and its corporate sector.
Last year, the Trump administration’s tax cut provided a substantial boost to post-tax profits and was enough to buoy the US stock market to new record highs, masking the deterioration of pre-tax profitability of the US corporate sector.
However, the fiscal stimulus has started to fade and we are forecasting US profits to continue to stagnate throughout next year, as rising labour costs and weaker capacity utilisation will put margins under further pressure.

The next crisis?

The IMF is worried that parts of the last crisis are repeating themselves, as dollar financing rises.
Emerging markets are particularly exposed, but we find that this exposure is not uniform and even if dollar funding is disrupted there are parts of the sector where the impact should be limited.

Fiscal policy: lessons from Japan

While things would have been worse without public spending, a lack of a durable recovery in growth or sustained inflation suggest that Japan’s experience with fiscal policy in the 1990s was ultimately unsuccessful.
For the rest of world, Japan’s failure has shown that to be most effective, fiscal spending should come in large doses, be productive and sustained. Japan’s case highlights the difficulty that fiscal policy faces if attempting to offset much larger headwinds in the private sector, or lift the potential growth rate.

Read the full Viewpoint (pdf).