Additionally, we are worried about the impact of negative rates on the banking sector, as this may reduce banks' net income margins. Thinner margins mean banks have less money to lend. A decrease in money being lent means there is less money circulating through the economy, which means people are spending less, which prevents the global economy from growing.
Going forward, monetary policy will likely have diminishing returns and increased risks. Fortunately, monetary policy is just one of the macro tools in the policy kit. We believe policymakers must focus more attention on two other tools — structural reform and a fiscal policy that supports infrastructure — that have the potential to bring about robust and lasting benefits. India, one of the world's fastest growing economies, is a good example of this modernized approach.
Fiscal policy to improve aging or inadequate infrastructure, such as roads and bridges, is another powerful tool that can provide long-term benefits to many areas across the globe. Given the focus on austerity, we have seen limited focus on fiscal policy.
The time has come to reckon with the consequences of a one-dimensional approach to fixing the global economy by moving on to other options such as structural reforms and fiscal policy focused on infrastructure. Until we see a shift in policy, however, we advise investors to remain focused on the underlying fundamentals of their investments and not reach for yield or chase returns.