While aggressive monetary policy has been the most important catalyst for stabilization and rising asset prices in the past few years, fiscal policy should take the lead in 2013.
FISCAL POLICY TRANSPARENCY IS THE NEXT CATALYST
Years of determined monetary policy experimentation by the U.S. Federal Reserve and now central banks in Europe, Japan and China finally appear to be close to achieving their goal of balance sheet repair and reflation. As we progress through this Great Experiment, where monetary policy — along with the profit cycle and investors searching for yield in a no-yield world — drives asset prices higher, particularly in equities, the "transparency" of fiscal policy should take the lead position.
We don't mean to suggest that fiscal policy is going to be pro- growth, particularly in the U.S. and Europe. Rather, we believe that greater transparency on the fiscal front alone (though not necessarily the specific policy within it) should be sufficient to give corporations and investors what they need to plan and act, to kick-start a reallocation of capital, in terms of rising capital expenditures and an investor shift from conservative short-dated low- or no-income-producing assets into more productive assets, such as equities.
In other words, in 2013, the big fix should begin, and it should occur around the world. The U.S. and Europe are already in the early stages, and China is beginning as well. Easy monetary policy, which was the catalyst for stabilization and rising asset prices when the credit crisis first broke, should continue, but now as part of the base — a given — that investors expect, along with continued healthy corporate profits and attractive equity valuations.