It probably hasn’t escaped anyone that the world looks a bit less laissez-faire than it used to. Industrial policy is back, in a big way. But what does that actually mean?
That’s what the “long-term strategy” research unit at JPMorgan — led by the veteran Jan Loeys — has tried to tackle in their latest report. They reckon the shift towards more industrial policy is “likely to continue in an era of resurgent strategic competition”. That means more measures such as state loans and grants, tax credits, and trade support (tariffs are so passé).
Less obviously and Davosy, the report authored by Alexander Wise and Loeys argues that this will be a good thing overall — as long as you live in one of the major economic blocs, or work in a favoured industry. Investors might theatrically gnash their teeth, but it seems they can relax. Here are their main bullet points:
— Empirical evidence suggests that it will probably increase aggregate employment, investment, R&D, innovation, and output. There is no evidence of effects on margins, so increases in revenues translate into increases in earnings. Pecuniary benefits also directly raise profits.
— In an era of resurgent strategic competition, industrial policies are likely to be pursued competitively by countries. Thus, it is most likely to be effective in countries with large economic mass, fiscal capacity, and effective governance. Competitiveness will be harmed in countries without this capacity.
— Based on these criteria, the US, China, and the EU are most likely to effectively pursue industrial policy. However, industrial policy in China is pursued to a large degree through state-owned enterprises, with probable adverse impacts on private enterprise. EM ex-China is unlikely to be able to effectively marshal sufficient resources to compete.
— Any global resurgence in industrial policy has implications for strategic asset allocators in several dimensions. It should affect sector allocations, country allocations, and allocations to small versus large caps.
— Industrial policy is likely to benefit Information Technology, Industrials, Energy and Basic Materials. This is one motivation for a strategic equity overweight on these sectors in the US and the EU, but an underweight on these sectors in competing EM countries. This is also an argument for a strategic overweight on the US and the EU.
— The largest benefits of industrial policy should accrue to small-cap equities, since it can alleviate financial constraints, which more frequently affect smaller companies. Large caps are also more likely to incur costs associated with countervailing duties or market access restrictions.
Anyway, if you’re interested in the full report, we’ve uploaded it here. Let us know what you think.