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Time for fiscal experiments to be unwound, says Butterfield chief


The economies of the world need to be driven by economic fundamentals to achieve growth, rather than the supply of cheap money, according to Michael Neff, executive vice president and head of group asset management at Butterfield.

Neff (pictured) was speaking at the bank’s annual wealth management seminar in London, which included a keynote speech from explorer Sir Ranulph Fiennes.
Neff noted that the financial crisis “took the stuffing out of economic growth around the world” and since that time there had been experiments in the US, UK, Europe, Japan and China, through which monetary and fiscal policies were manipulated to aid economic recovery.
He said: “We need more growth by fundamentals and less by engineering from central banks. The monetary experiments we see today must begin to be unwound.”
The US has embarked on the “mother of all experiments”, with a mix of fiscal stimulus, three rounds of quantitative easing and “forward guidance”; unprecedented moves aimed at reviving the economy. There has been some progress towards recovery as a result, based on housing starts, automotive sales, personal consumer spending and job creation.
“Economies need banks to lend money and a lot of work has been done around that in the US, where the strength of banks’ balance sheets have been significantly improved. However, much work remains for their European counterparts,” he said.
Neff said that in the UK, a blend of austerity and quantitative easing had met with mixed results: a flirtation with a triple dip recession and the downgrading of Government debt; and noted that there is reasonable optimism that the UK is now on a path to continued growth. Similarly, austerity, bailouts and ECB commitments in the EU had led to indications of a nascent recovery, although structural issues still need to be addressed and there is a risk of further European flare-ups.
In his views on Asia, Neff said, Japan has seen quantitative easing and generous fiscal stimulus, with some tenuous steps towards market and fiscal reforms and, in China, the goal is lower but more sustainable growth with contained inflation.
Neff sees opportunity in the emerging BRIC markets, despite some tremors over the summer. He noted that there had been changes since 1998 including a move by many currencies to float instead of being pegged. Foreign currency reserves are more robust and a greater percentage of debt is denominated in local currency, meaning the exodus of capital is now more manageable. He said it is also a matter of debate whether emerging markets were de-coupling from the developed world.
In Neff’s view a growing middle class is being created in the emerging market economies with consumptive behaviour to follow, similar to the US and Europe after the Second World War.
Neff predicted that global economic fundamentals would continue to improve, albeit very gradually. Asset prices and equity markets had significantly benefitted from fiscal experiments and a near-term correction is possible. However, Butterfield maintains its stance of overweight equities favouring the US and underweight fixed income favouring credit over sovereign exposure over a 12-month investment horizon.

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