Martin Conlon, head of Australian equities at Schroders noted consumer spending has risen, but there is uncertainty for the 2021 outlook as government support measures such as JobKeeper and the temporarily raised JobSeeker payments are set to taper off.
From Mr Conlon’s perspective, much of the money supply that has come from governments borrowing and handing back to consumers to encourage spending has buoyed retailer profits – particularly for companies such as JB Hi-Fi and Premier Investments.
“That’s been very successful and it’s been interesting from our point of view… that putting money back into the hands of people who aren’t used to having it, particularly those who haven’t been beneficiaries of the asset price boom of recent years, can have a reasonably powerful impact on the economy,” Mr Conlon commented during an online briefing.
“Those people are very willing to spend, they haven’t had the resources to spend and when money gets put in their hands, they have obviously a reasonable propensity to spend.”
Whether the occurrence is sustainable is questionable, but the fund manager has argued the success of stimulus has called into question central banks’ previous reliance on interest rates, asset pricing and the trickle-down effect.
“The government handing out money directly is, in our eyes, having a much more effective impact in actually getting things to happen in the economy and probably also highlights the need to redistribute a fair bit of income given how much those asset price gains have been centred on a small proportion of the population,” Mr Conlon said.
The Australian equities head has self-identified as a free marketeer, but the manipulation of interest rates to artificially boost asset prices has “nothing to do with free markets”, he said, calling the past decade “frustrating”.
“We haven’t had free markets for a long time,” he said.
The rise of asset prices has instead accelerated the value of assets owned by the wealthy at as much as 10 or 15 per cent a year.
In this sense, the ultra-low cash rates are working against the effectiveness of wealth distribution in closing the gap, because it is difficult for governments to hand out cash at the same pace as increasing asset prices.
“Unfortunately, central bankers are continuing to believe that their distorting of everything, including buying every asset that moves at any price they feel like, is the right thing for the economy – that’s a view that happens to not be one I agree with,” Mr Conlon said.
But the wealth divide is only expected to grow in significance, particularly as governments look to recover their economies.
“Inequality, to me, is a big issue and it will be a big issue for many years into the future,” Mr Conlon said.
“Governments are going to be under pressure to do something about it, because like it or not, central bank policies are fuelling it. As much as they don’t want to admit it, that trickle-down effect, there’s not much evidence of it working. Pumping up asset prices, the benefits of that go to a small number and their propensity to spend isn’t big.”
Schroders head of fixed income and multi-asset Simon Doyle echoed his colleague, commenting individuals on lower incomes tend to spend more of their cash than those who earn more. But it also has greater social ramifications for the long-term.
“The wealth distribution argument I think is a much broader one, in the sense that a lot of the global unrest, a lot of the issues that you’re seeing in the US and Europe are being driven off this idea, that the policy environment was happening before the GFC, it’s been exacerbated post-that, it’s really driven this wedge,” Mr Doyle stated.
“So the rich have gotten richer and the poor have actually got poorer. And I think that’s much more important in the longer run sense, to try and close that gap, otherwise it’s going to lead to a whole lot of social and political dislocation, which I don’t think anyone really would be looking forward to.”
There are also effects on the housing market in Australia. The low cash rates, Mr Conlon commented, have served as an incentive for “speculative behaviour” in the market, where people will punt against their rise and fall.
Recent analysis from the RBA has forecast house prices are set to rise.
“Using prudential tools, restrictions on borrowing versus wages, there are hundreds of tools, obviously, that can be used to control house prices, but the starting point is to at least not exacerbate the situation,” Mr Conlon added.
“The problem, when you have a very leveraged financial system, is that central banks are extremely worried about going the wrong way, because that is what they’re most worried about in terms of the financial system, collapse.
“Unfortunately, we’re at a hypersensitive level. And keeping that fine balance between having them not go crazy, while sustaining them at crazily high levels is a very difficult tightrope to walk.”
